More than 20 investment banks and market makers have signed up for Deutsche Börse’s attempt to draw London’s prized swaps clearing business from its City home.
Barclays, Citadel Securities, UBS, HSBC and ABN Amro are among the institutions joining the Frankfurt-based exchange and its scheme to share the profits from clearing with its users. An incentive programme expires later on Monday.
The clearing of euro-denominated swaps has become highly contested since Britain voted to leave the EU last year amid calls for it to be moved to the eurozone. A clearinghouse sits between two parties in trade and manages the risk to the market if one side defaults on payment.
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Deutsche Börse’s Eurex Clearing is trying to persuade banks worried about the uncertainty surrounding Brexit to forgo their preference for London-based LCH, which plays a dominant role in the daily plumbing of global financial markets.
LCH accounts for more than 90 per cent of the global clearing business for interest rate and foreign exchange swaps and has been hitherto unaffected by EU plans for tougher oversight.
Last week LCH set a new record for the notional amount cleared in one day, processing $7.7tn. Swaps denominated in euros and dollars were among its biggest deals.
Deutsche Börse will share the profits with its 10 most active market participants. Bank of America Merrill Lynch, Citigroup, Commerzbank, Deutsche Bank, JPMorgan and Morgan Stanley have already backed the scheme, which begins at the start of 2018.
“Clients are looking for a market-led alternative to clear interest rate swaps — and we are a committed partner,” said Erik Müller, chief executive of Eurex Clearing.
The industry-sharing model follows the one taken by LCH, in which the London Stock Exchange Group holds a majority stake and the balance is held by banks. LCH’s unique ownership structure and profit-sharing arrangement have helped it see off competition from the US’s CME Group and Deutsche Börse.
UK authorities such as the Treasury and Bank of England are against EU proposals for enhanced supervision of the interest rate swaps market in London, or that banks are forced to relocate their swaps clearing business to the eurozone.
But UK officials acknowledge that banks are free to move their business where they choose and argue that resolving future joint supervision of fixed income or repo markets is more critical.
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The repo, or repurchase agreement market, is a crucial source of short-term funding and collateral for banks, helping them meet margin requirements for derivatives trades. The European Central Bank also sees the market as a vital mechanism for transmitting monetary policy.
The UK argues that repos absorb more money and liquidity in the market because they are securities and settled differently from derivatives trades. The LSE has said that heightened oversight “could form part of a specific discussion” with the EU.
European policymakers have become worried about the risks posed by clearinghouses. A link between the French arm of LCH and the main Italian clearing house was put under severe strain in 2011 during the eurozone crisis.
A decision by the French business to raise its margins on November 9 that year put pressure on the Italian government debt market, a subsequent report from the Bank of Italy said.
Philip Stafford
