PARIS (Reuters) - European Union plans to scrutinize clearing of euro-denominated derivatives outside the bloc could fragment markets and cost EU customers 20 billion euros ($23.5 billion) a year, London Stock Exchange (LSE.L) Chief Executive Xavier Rolet said on Tuesday.
The LSE owns LCH in London, the dominant clearing house for interest rate swaps in Europe denominated in euros. But London will no longer be part of the EU when Britain leaves the bloc in March 2019.
The EU plans to propose joint supervision of foreign clearing houses that serve the bloc’s customers. As a last resort, clearing would have to move inside the EU.
“The potential proposal to fragment and separate the clearing of euro-denominated derivatives would lead to a deteriorating execution price of somewhere in the region of 20 billion euros in additional cost to EU-based investors ... per annum,” Rolet told a conference organized by EU securities watchdog ESMA.
The euro clearing law was proposed due to Britain’s decision to leave the EU in March 2019, which will put a clearer that handles most euro-denominated swaps out of reach of the bloc’s regulators.
Brexit means that banks currently serving EU clients from London must decide whether to move activities by March 2019 to avoid potential disruption to cross-border business like euro clearing or reporting market transactions.
“Some time in the next year we will need to make a decision, and the earlier the better,” Sylvie Matherat, chief regulatory officer at Deutsche Bank (DBKGn.DE), which has a major operation in London.
Earlier this month, LSE rival Deutsche Boerse’s (DB1Gn.DE) Eurex Clearing arm announced a plan to attract customers away from LCH and clear their euro-denominated derivatives in Frankfurt.
Rolet told Reuters he had not seen volumes move from LCH to Eurex and was not worried by the Eurex plan, which he said mimics an offering at LCH.
“Debating this subject will take a lot of time, it’s a technical subject. They have been clearing interest rate swaps for three years and to our knowledge they have not done anything,” Rolet said of Eurex’s impact on the market.
“Imitation is the best form of flattery. We are being imitated and we welcome the renewed focus on customers. Customer partnership is our model and it has worked well,” Rolet said.
Thomas Book, chief executive of Eurex in Frankfurt, told the conference that the aim of its plan was to offer choice for customers.
Additional reporting by Maya Nikolaeva; Editing by Mark Potter and Adrian Croft