Monday 7 June 2021 11:57 am

Brexit: Forced relocation of derivatives clearing from City to Frankfurt would only hurt EU, LSE warns

In case the European Union does press ahead with the forced relocation of Euro derivates clearing from London to European capitals, costs for customers will jump and would ultimately put EU firms at a competitive disadvantage compared to their international rivals, according to the London Stock Exchange.

“Restricting access to the EU economy and the euro would place EU firms in competitive disadvantage against their peers and would also increase risk to financial stability both in the EU and more widely,” the LSE Group said in a note to clients, issued late on Friday.

The European Commission is currently looking into how interest rate swaps positions could be moved from LSEG’s LCH clearing arm in London to the Deutsche Boerse Eurex index in Frankfurt.

At present, the vast majority of the multi-billion global market is cleared on LSE’s LCH clearing arm in the City.

Mandatory relocation could push euro clearing to New York, some experts fear. The LSE shares that view.

“LCH fully shares the concerns raised by our customers: regulatory-driven market fragmentation will not produce any significant benefits either to market participants, financial stability or to national economies,” LSE wrote.

Illustrating the international use of the Euro, the LSE stressed that, last year, EU firms made up only 27.1 per cent of the Euro-denominated interest rate derivatives clearing volumes at LCH, with 72.9 coming from non-EU based financial services firms.

Since the UK left the European Union, the latter has blocked firms based inside the borders of the EU, from using London derivatives platforms –  pushing most into the U.S. so they can continue to trade.

The European Central Bank does have the authority to demand bourses in third-party countries open a deposit account and provide Europe’s central banking authority with more oversight over the clearer’s payment flows in Euros.

“”LCH Ltd is fully supportive of this requirement,” the note read.

Desk mapping

Two weeks ago, the ECB said it plans to scrutinise and crack down on so-called ‘desk mapping’ – or ‘back-to-back booking’ – to determine whether banks’ key staff, capital and book trades used by EU-based clients are not based outside the bloc.

The bank believes that currently, too many bank rely too heavily on their London units while serving clients across the EU, thereby escaping regulatory scrutiny and oversight, according to a Bloomberg report, citing anonymous sources to the ECB.

For international banks wanting to do business in the EU post-Brexit, the use of blank typos would reportedly no longer be allowed.

The primary objective is to reduce the number of EU-based clients that are solely or predominantly served by units and teams in the City and Canary Wharf.