LONDON, May 18 (Reuters) - 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 bust.
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 in Frankfurt.
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 Europe.
“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 regulators decide.
“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)