By Huw Jones
LONDON, Sept 30 (Reuters) - Forcing banks in the European
Union to shift euro clearing from the City of London would
prompt a backlash among cost-conscious banks, a senior London
Stock Exchange official said.
The EU has long wanted euro clearing, a core part of the
City's offering as a global financial centre, relocated to the
bloc to supervise risks directly, stepping up its efforts since
Britain voted for Brexit.
But market users are reluctant to make the costly move.
The LSE's LCH unit clears the bulk of euro-denominated
interest rate swaps bought by companies across Europe to hedge
against adverse moves in borrowing costs.
"If there is a forced fragmentation, then some impacted
firms may react by seeking to re-route trades via different
entities," Daniel Maguire, LCH Group CEO, told Reuters.
"Ultimately it is critical to all participants to have
unfettered access to the best liquidity and prices - even more
so during volatile markets, such as we saw during March and
April."
EU banks could use their non-EU based units to access the
global swaps market to hedge across multiple currencies, or use
foreign clearers that have EU access, like CME in the United
States.
The Brexit transition period, which has maintained the
status quo this year, ends on Dec. 31 and although LCH has been
granted continued EU access from January, it is only for 18
months to give banks time to end what Brussels calls "excessive
reliance" on UK clearers, and build up the EU's capital market.
"We are very pleased with the outcome, it's a step in the
right direction," Maguire said.
EU regulators will now assess if LCH should have permanent
access, or if EU banks must switch to a bloc-based clearer.
Maguire said LCH's market share has hardly budged since
Britain voted to leave the EU in 2016, despite increased efforts
by Frankfurt rival Eurex to attract a bigger slice of the
market.
Of the 46 trillion euros of live, open swaps in euros,
around 80% is driven by counterparties outside the EU, Maguire
said, meaning they are largely beyond the bloc's regulatory
reach.
U.S. banks are particularly active in euro swap trades that
need clearing, and this is likely to increase given how U.S.
banks are making more inroads globally than their less
profitable EU peers.
"It's hard to see what will fundamentally change, in terms
of the dynamics in clearing, unless there is a mandatory
relocation policy, which would cause fragmentation and
remove the compelling economic efficiencies for all EU firms,"
Maguire said.
(Reporting by Huw Jones; Editing by Kirsten Donovan)
