Forced offshoring of swap netting to EU would hurt bloc, says LSE
By Huw Jones
LONDON (Reuters) – Forcing euro derivatives clearing to move from London to the European Union would increase costs for customers and put European companies at a competitive disadvantage compared to their international counterparts, argued the London Stock Exchange Group in a note to clients.
The EU is investigating how trillions of euros of interest rate swap positions could be moved from LSEG’s LCH clearing arm in London, where most of the global market is cleared, to compete with Eurex from Deutsche Boerse in Frankfurt.
Britain’s access to the EU financial market was largely cut off after Brexit came into effect on December 31, 2020 and LCH is only allowed to serve EU customers until in June 2022.
EU officials say they want a comprehensive view of the large-scale activity of EU-regulated banks and asset managers in order to monitor any potential threats to the bloc’s financial stability.
“Restricting access to the EU economy and the euro would place EU companies at a competitive disadvantage compared to their peers and also increase the risk to financial stability both in the EU and more broadly, “LSEG said in a note released Friday.
LCH is already directly supervised by the EU’s securities regulator, ESMA, LSEG added.
Some industry officials fear that mandatory offshoring will push euro clearing to New York in the same way that EU restrictions have done for trading in euro derivatives.
“LCH fully shares the concerns expressed by our customers that regulatory-induced market fragmentation will not yield any significant benefit for market players, financial stability or national economies,†said LSEG.
EU firms accounted for just 27.1% of euro-denominated interest rate derivative clearing volumes at LCH in London in 2020, with 72.9% coming from non-European firms, LSEG said.
This illustrates the international use of the euro and the need for EU companies to have access to international clearers to cover their risks in euros as well as in other non-euro currencies, he said. added.
The European Central Bank has the power to require LCH to open a deposit account with it to give the central bank more control over the compensator’s euro payment flows, LSEG said.
“LCH Ltd fully supports this requirement,†said LSEG.
(Reporting by Huw Jones; Editing by Toby Chopra and Pravin Char)