* Industry concerns over banks moving chunk of clearing pool
* Moving swaps clearing 'a significant risk' - ISDA chairman
* Mammoth task would bump up costs for companies
By Huw Jones
LONDON, Sept 20 Moving euro-denominated clearing
from London to the continent after Britain leaves the European
Union would be a mammoth task and bump up costs for companies, a
senior derivatives industry official said on Tuesday.
The prospect of Brexit has triggered calls from EU leaders
like French President Francois Hollande for clearing of
euro-denominated transactions like swaps to move from Britain to
the euro zone.
"We are still exploring the consequences of the euro
clearing issue which are multidimensional," Eric Litvack,
chairman of the International Swaps and Derivatives Association
(ISDA), a trade body, told reporters.
"It's very difficult to position ourselves on what is to a
large degree a political debate."
Average daily turnover in Britain of euro-denominated
interest rate swaps totalled $928 billion in April 2013, or 69
percent of the global market. ICE in London is the
leading exchange in trading of euro short-term interest rate
Litvack said there are industry concerns about what would
happen if banks were compelled to move a chunk of the clearing
pool, making it more costly for users.
Users benefit from netting positions against each other
inside the pool, thereby saving on cash used to back trades.
"Moving the swaps clearing business would be a significant
risk. Moving part or large part of that would be a non-trivial
exercise," said Litvack, who is also head of regulatory strategy
at French bank SocGen.
London is Europe's top centre for trading and clearing
swaps, a derivative contract banks and companies use to insure
against damaging moves in currencies, interest rates or
Clearing houses manage credit risk in the event one party in
a swap deal defaults.
Despite UK finance minister Philip Hammond casting doubt
this month that euro clearing will move, bankers at the ISDA
event see the shift of some euro clearing to the continent as
inevitable, but differ over timelines.
Some say it could happen fairly quickly if the merger of
London Stock Exchange and Deutsche Boerse goes ahead.
The bulk of interest rate swaps are cleared in LSE's
LCH.Clearnet, and they could be diverted to Deutsche Boerse's
Eurex Clearing, a senior banker said.
JUMBLE OF RULES
The derivatives sector runs on a jumble of EU rules which
Litvack said that to work properly, they assume that London, the
bloc's dominant volume supplier, is part of the single market.
This is likely to end as Britain curbs the free movement of
EU citizens, a step EU leaders say would bar it from having
unfettered single market access in future, Litvack said.
"The likelihood that the current situation would survive an
exit from the single market seems a pretty aggressive
Alternatives include relying on "equivalence" or whereby the
EU grants market access to a non-EU country that applies similar
Litvack said "equivalence" was likely to be complicated and
open to political interference.
These doubts, coupled with no expectation of continued full
access to the single market, are prompting banks in Britain to
work out how much of a presence they will need in the EU to
continue serving customers.
"That is the real debate," Litvack said.
Bankers at the ISDA conference said setting up a new base in
the EU would take at least three to five years, and run into
hundreds of millions of pounds in some cases.
After Britain starts formal divorce talks with Brussels, it
has only two years before EU rules cease to apply, leaving banks
under pressure to act sooner rather than later.
"Everything that needs to be done in two years takes more
than two years," Litvack said.
(Editing by Susan Thomas)