LONDON The European Union is due to announce in the next few weeks how long derivatives clearing houses in Britain can continue serving EU customers after Britain’s Brexit transition ends on Dec. 31.
This “time-limited” access will avoid severe disruption to over-the-counter or OTC derivatives worth trillions of euros that are cleared at LCH in London.
WHY TIME-LIMITED?
It increases leverage for the EU, which wants a deeper capital market that relies less on the City of London.
The bulk of clearing in privately traded or OTC euro-denominated interest rate swaps for EU investors is done in London and there is little sign of this changing substantially anytime soon. Time-limited access allows clearers inside the EU to build up their capacity to take over from London. A deadline would put pressure on banks to move positions from London to the euro zone.
HOW MUCH EURO CLEARING HAS MOVED SO FAR?
LCH says nothing discernible. Deutsche Boerse’s Eurex, the only EU-based clearer of euro swaps of note, said it has around 19 trillion euros of outstanding notional value in rate swaps and forward rate agreements. Eurex has 7.3 trillion euros purely in swaps compared to LCH’s 45.8 trillion euros. Eurex has an overall target of 25 trillion euros or a quarter of the market by the end of this year.
WHAT’S INVOLVED IN A MOVE FROM LONDON?
Banks would have to close out or sell their swaps positions worth billions of euros in London and open new positions in Eurex. It is a costly and complex transaction that can take several hours or longer and leave the seller in a potentially vulnerable situation. There is no mechanism for shifting such huge positions in a short time.
CAN THE EU GET ALL OF THE EURO MARKET?
No, because only a portion is transacted between EU based counterparties, the sub-sector the bloc’s regulators can realistically target. LCH is likely to remain the clearer for euro swaps traded between non-EU counterparties.
WILL LONDON GET ACCESS FOR THE LONGER TERM?
Most likely. It would be hard for the EU to shut off LCH completely given that it already allows clearers in the United States like CME and ICE to serve EU customers. In return for access, Britain has to allow the EU to jointly supervise LCH until it no longer clears a “systemic” amount of euro trades, a politically sensitive requirement. Otherwise Brussels could force EU investors to use an EU or another non-British clearer it approves of.
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