| LONDON, June 12
LONDON, June 12 Shifting clearing of
euro-denominated derivatives from London to the European
continent would require banks to set aside far more cash to
insure trades against defaults, a cost that would be passed on
to companies, a global derivatives industry body says.
The European Union's executive European Commission is due to
publish a draft law on Tuesday on how the clearing of euro
denominated financial instruments should be handled after
Brexit. Clearing stands between two sides of a transaction to
ensure its safe and smooth completion.
The London Stock Exchange's subsidiary LCH currently
clears the bulk of euro-denominated swaps, a derivative contract
that helps companies guard against unexpected moves in interest
rates or currencies. Britain, however, is due to leave the bloc
in 2019, putting it out of the EU's regulatory reach.
The International Swaps and Derivatives Association (ISDA),
one of the world's top derivatives industry bodies, said
on Monday that a "relocation" in euro clearing to continental
Europe would split liquidity in markets and reduce the ability
of banks to save on margin by offsetting positions in the same
That would lead to an increase of 15 to 20 percent in
initial margin or cash that is set aside against a trade in case
of a default, it said.
"Many of the detrimental consequences ... will be felt most
keenly by banks' clients," ISDA Chief Executive Scott O'Malia
said in a letter to the European commissioner in charge of
financial services, Valdis Dombrovskis.
"A relocation policy is also likely to heighten financial
The focus should be on "appropriate arrangements" for
oversight and cooperation in respect to UK-based clearing
houses, ISDA said. The EU has said that one option is to have
direct supervision of a clearing house in London.
Last week another industry body, the Futures Industry
Association, said relocation would nearly double the amount of
margin that would be needed, to $160 billion from $83 billion
However, Frankfurt-based Eurex Clearing, which
could benefit from any relocation, has indicated that extra
margin costs would be far lower in practice.
(Reporting by Huw Jones; Editing by Susan Fenton)