LONDON May 18 Forcing banks to move
euro-denominated trades from London to Frankfurt would be
costly, and continental companies would ultimately foot the
bill, an industry body said on Thursday.
The European Union's executive European Commission is due
next month to set out a draft law on how derivatives denominated
in the single currency should be cleared and supervised.
Clearing stands between a buyer and seller of a security,
ensuring the transaction is completed even if one side goes
EU policymakers and the European Central Bank want direct
oversight over potential risks to euro zone financial stability
. Currently, most trades are processed or cleared in
London at LCH, but Britain is set to leave the bloc in
2019, putting it out of reach of EU regulators.
Simon Puleston Jones, head of Europe at the Futures Industry
Association, said forced relocation of clearing would mean
closing LCH positions and opening corresponding ones at Eurex
Eurex would require margin or cash against the trades and
ask its members to bump up contributions to the default fund,
Puleston Jones told a conference in London organised by the
banking industry body Association for Financial Markets in
"Is there enough capacity in the market to take the other
side of the trade when you are trying to close out your
position?" he said.
Eurex would require its margin before a bank could get back
cash posted with LCH. "You've got a day-one funding issue, which
is going to be a big number," he said.
Stripping the UK position of euro-denominated swaps would
also reduce "offsets" and force LCH to ask for more margin. "The
ultimate people who are harmed by this are the EU27 firms,"
Puleston Jones said.
But Niels Tomm, an executive director at Eurex's owner,
Deutsche Boerse, said eventual costs would hinge on what
"The big question is what happens to the liquidity if there
is a stricter measure. Will liquidity then move, which is
possible," Tomm said.
"The EU27-based clearing houses are capable and have
scalable systems. That is true for us," Tomm said.
There are also other types of offsets banks could benefit
from to avoid margin hikes, he added.
Puleston Jones said it was unclear if actual trading of
swaps by EU customers must shift to the continent after Brexit,
since starting in January 2018 banks must trade on a platform
recognised by the bloc.
The LSE has warned that losing euro clearing would mean
thousands of jobs being lost in the UK.
(Reporting by Huw Jones, editing by Larry King)