LONDON (Reuters) - Pan-European exchange Euronext has extended its contract with Britain’s LCH in a surprise move that could help defuse tension over where euro-denominated trades are cleared after Brexit.

FILE PHOTO: Company stock price information is displayed on screens as they hang above the Paris stock exchange, operated by Euronext NV, in La Defense business district in Paris, France, December 14, 2016. REUTERS/Benoit Tessier/File Photo

Clearing, an arcane part of the plumbing of financial markets, has become highly politicized since Britain’s vote to leave the European Union in June last year.

Euronext ENX.PA had said in April that it planned to use Intercontinental Exchange ICE.N in the Netherlands for clearing, when its contract with LCH, which is owned by the London Stock Exchange Group LSE.L, expired in 2018.

But on Tuesday Euronext and LCH said they have signed binding terms for a 10-year clearing deal they expect to complete in the fourth quarter of this year.

Clearing ensures that a stock, bond or derivatives transaction is completed safely and smoothly, even if one side of the deal goes bust.

Euronext said the deal avoids customers facing added costs of switching from one clearing house to another at a time when they already face major challenges like new European Union securities rules, and adapting to Britain being outside the EU.

Under the deal, Euronext will swap its 2.3 percent stake in LCH Group in London for an 11.1 percent share in LCH’s Paris unit, giving Euronext and its shareholders a financial incentive to increase clearing volumes in France.

“Our clients tell us they expect to clear more business in the euro zone after Brexit than they do today, so we will be working closely with LCH SA to develop new products,” Lee Hodgkinson, Euronext’s head of markets and global sales, said.

“We will be very quickly consulting with clients,” he told Reuters following the announcement of the deal.

Euronext and LCH will “work together” to cut clearing fees by 5 to 15 percent from January 2019, Euronext said.

GOOD FOR PARIS

The Bank of France, which regulates LCH SA, said the deal would be good for Paris as a financial center, ensuring continuity and stability of trading. Paris wants to attract securities trading by banks from London after Brexit and cheaper clearing could help it do so.

Euronext has long wanted to buy LCH SA - the bourse represents over half of its business - and Tuesday’s agreement gives it “pre-emption” rights if the LSE decided to sell more than 50 percent of the shares in the Paris business.

Euronext said it sees “substantial” growth opportunities in fixed income and credit default swaps from the deal, while LSE said it has no plans to sell LCH SA.

EU policymakers have said that clearing of euro denominated swaps or derivatives, which LCH’s London Swapclear unit dominates, should move to the euro zone after Brexit.

LCH declined to comment on whether Tuesday’s deal would help meet euro zone demands.

But the deal will make it harder for Deutsche Boerse DB1Gn.DE owned rival Eurex in Frankfurt to pick up any euro clearing business that shifted to the single currency area.

“This increases competition in the clearing landscape across Europe as a whole, not just in the euro zone,” Hodgkinson said.

Euronext will have to pay ICE an undisclosed break-up fee, which Hodgkinson said was “immaterial in absolute value”.

ICE and Eurex declined to comment on the deal.