UPDATE 1-Britain backtracks over Brexit curbs on cross-border swaps trading

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LONDON, Dec 31 (Reuters) - Britain’s markets watchdog said on Thursday it would allow UK market participants to use platforms in the European Union to trade swaps for up to three months in a bid to avoid potential disruption in markets.

Following Britain’s full withdrawal from the EU at 2300 GMT on Thursday, UK and EU market participants faced not being able to trade swaps worth billions of euros with each other when markets reopened on Jan. 4. Branches of EU banks in London would have been particularly hit.

Faced with the EU’s refusal to lift its ban on trading swaps in London, the Financial Conduct Authority said on Thursday it would temporarily allow UK financial firms to use platforms in the bloc if they do not have arrangements in place to execute the trade elsewhere, such as in the United States.

“We will consider by 31 March 2021 whether market or regulatory developments warrant a review of our approach,” the FCA said in a statement.

The move means that some swaps trading is likely to leave the City of London for EU platforms from next Monday.

It comes after the Bank of England had warned that interest rate swaps worth around $200 billion could be disrupted due to the clash between UK and EU swaps rules, known as the derivatives trading obligation or DTO.

Britain had already taken a similar decision for euro denominated shares by allowing UK banks and investment firms to use EU platforms from Monday given that trading is set to move to the bloc. (Reporting by Huw Jones; editing by Simon Jessop and Rachel Armstrong)