By Huw Jones
LONDON, Aug 19 (Reuters) - London will remain a big part of
Europe's financial market plumbing well beyond Brexit as the
coronavirus pandemic has thwarted Frankfurt's ambitions to grab
billions of euros worth of derivatives clearing business from
Britain.
Clearing ensures financial market trades are completed even
if one side of the transaction goes bust. It is a high-volume,
low-margin business but a critical part of market
infrastructure. London’s leading role in the clearing business
has helped to cement its status as Europe’s top financial
centre.
Other European centres, such as Frankfurt, keen to claw back
a chunk of this business, saw Brexit as a chance to reduce
London's grip on clearing euro-denominated trades.
But Deutsche Boerse's Eurex Clearing, considered
the strongest candidate to take business from the London Stock
Exchange’s clearing division LCH, said its euro clearing had
grown more slowly than expected due to delays in regulation
changes, the COVID-19 pandemic and a broader reticence by banks
to shift from London.
"There is a slower growth path than we initially had
expected for the second half of this year primarily due to
COVID-19 and its implications, but everything is going in the
right direction to achieve our goals," Eurex Clearing board
member Matthias Graulich told Reuters.
Eurex said it accounts for 19 trillion euros ($22.67
trillion) of the total market of 100 trillion euros in notional
outstanding value in euro interest rate derivatives and forward
contracts, with LCH taking the rest.
In swaps alone, Eurex has 7.3 trillion euros, or 14% of the
market, compared with 45.8 trillion euros at LCH. Eurex has a
goal of reaching an overall euro clearing target of 25 trillion
euros by the end of 2020.
"It is extremely difficult to say where we are on the
journey to achieve our goals by 31 Dec, a year-end is not a
magic date if you are building a business, it is more relevant
that the trajectory is up and we make month-by-month progress,"
Graulich said.
He said a new rule that requires market participants like
asset managers to provide margin - a form of deposit - against
swap trades for the first time will lead to greater use of Eurex
by new customers.
But the rule has been delayed by a year to September 2021
due to COVID-19.
Graulich also said several banks had put off plans to close
swaps positions in London and reopen them in Frankfurt when the
pandemic was disrupting markets and while many traders were
working from home.
The LSE said there had been no discernible shift in clearing
from London.
Lawyers said banks will not move positions from London to
Frankfurt voluntarily because of costs and complexity at a time
when they are firefighting the pandemic.
Given the lack of movement, the EU is set to decide in the
next few weeks on the length of time it will allow LCH's
clearing of euro swaps for EU customers to continue after
Britain's full access to the EU ends in December.
"It's very hard to see why the EU is playing around with a
time limit because Catch 22 remains in full force with banks not
moving positions unless ordered to," said Simon Gleeson, a
financial services lawyer at Clifford Chance.
There is a political cost for Britain to maintain EU access
for its financial services industry - the Bank of England will
have to allow EU securities watchdog ESMA to jointly supervise
LCH.
The BoE has said "multiple hands on the wheel" in a crisis
could create confusion. The Bank said this month that clarity
was needed by the end of September to avoid market disruption.
ESMA said it was working to ensure timely access decisions.
Some loss of London's clearing business to the EU is seen as
inevitable once the pandemic has passed.
Graulich said the EU wants power over business like euro
clearing and that the amounts of business cleared inside and
outside the EU will affect decisions on access for Britain.
"The EU needs to develop its own financial market eco-system
with Brexit now ultimately happening. Taking a five to ten year
perspective, it is success critical for the EU."
($1 = 0.8400 euros)
(Reporting by Huw Jones. Editing by Jane Merriman)
