Clients should be free to choose where they clear euro-denominated derivatives, although many are ready to move business from CCPs in the UK to the EU if forced to do so, banking panellists said on an FIA webinar on 19 May.
“The client decides where they want to trade and where they want to clear,” said Robbert Booij, CEO Europe, ABN AMRO Clearing. “I am not so concerned about clients moving business. I am concerned about access being cut off.”
The European Commission has given temporary equivalence to three UK CCPs – London Stock Exchange Group’s LCH, ICE Clear Europe and LME Clear – until 30 June 2022, leaving the door open for a forced relocation of euro-denominated clearing once the temporary equivalence ends. During this time, European firms are being encouraged to reduce their exposure to UK CCPs by moving their euro business to Deutsche Börse’s Eurex in Frankfurt and LCH SA in Paris.
Currently, LCH in London clears more than 90% of euro-denominated interest rate swaps, widely used by companies to protect themselves against unfavourable changes in interest rates.
Speaking at FIA's Boca-V event in March, Mairead McGuinness, the EU’s financial services commissioner, said that the EU's reliance on UK clearinghouses was unsustainable and that rebalancing the exposure was a matter of financial stability for the EU.
EU officials are presently discussing with banks the steps needed to bring about a shift, but face concerns that splitting clearing would increase costs and disadvantage European firms.
"If EU banks and brokers can't offer access to UK CCPs because of a forced relocation, where they are obliged to only offer access to European CCPs, then there is no longer a level playing field. UK or US banks would continue to offer access to these European clients for UK CCPs, and European firms would be worse off," Booij said.
He added that forced relocation would increase costs by splitting the liquidity pool and reducing offsetting and netting capabilities.
"I'm also concerned that a potential forced relocation, while it's aimed at euro-denominated contracts, may also impact other asset classes…such as contracts on the LME," he said.
"Think about copper, zinc and aluminium, or some of the soft commodities on ICE – coffee, cocoa and sugar. As a result, European firms will no longer have the ability to allow their corporate clients, which could be a German car manufacturer or a cocoa producer in Switzerland, to have access to those liquidity pools. That is a serious concern."
Sabrina Wilson, global co-head of futures, clearing and FX prime brokerage at Citi, said clients were ready to clear in both London and Frankfurt, but managing risk from two different books could be costly.
"Clients are ready to clear on both CCPs. We have facilitated the onboarding for a number of clients, both EU and international, which points to our openness to choice and innovation. Clients are ready operationally. However, they are watching very intently the developments of average daily volume, notional outstanding and are driven by the cost of activity and collateral splits and other factors," she said.
Julien Jardelot, head of Europe government relations and regulatory strategy at LSEG, said that while there have been changes on the trading side with more volumes coming from US swap execution facilities and EU trading venues, clearing volumes at LCH have remained the same.
“The bottom line is we haven’t seen a change in market behaviour,” Jardelot said. “EU firms need access to the rest of the world if they are to remain competitive both in euro and also in other currencies.”
Philip Simons, global head of fixed income sales at Eurex, said the shift in clearing was a slow process but there had been an acceleration of CCP switching activity in recent months with examples from German banks, such as DekaBank, French government entities and UK asset managers who have "been able to switch significant portions of their volumes."
"Progress is definitely happening. Whether it's fast enough to keep the EU authorities happy. I'm not too sure," Simons said.
"The market wants to see split liquidity pools because that means competition and choice. Do we want to have three or four or five split liquidity pools? I don't think so. Is the market deep enough for two? I think it is, and that level of choice and competition is beneficial," he added.
Watch the video of the full UK/EU – Rebuilding a Relationship panel discussion, covering equivalence, euro clearing and financial stability here.
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