In a blow to London that reflects growing fears of a hard Brexit, Deutsche Bank has shifted the clearing of up to 50 percent of its euro-denominated derivatives trading from London to Frankfurt’s Eurex, the clearing division of Deutsche Börse.
Up to now, Germany’s largest lender has cleared virtually all its euro derivatives business via LCH Clearnet, a subsidiary of the London Stock Exchange. “We will in future clear a bigger part of our new business in euro derivatives on Eurex than before,” a Deutsche Bank spokesman said. Financial sources said that applied to 40 to 50 percent of new business.
Britain’s Lord Sugar, famous for hosting the UK version of “The Apprentice,” said Deutsche Bank’s decision was the “beginning of the end of London’s financial services industry,” while the Best for Britain group campaigning against Brexit called it “extremely worrying.”
The shift is an important partial victory for Deutsche Börse, which has been trying to attract a bigger slice of the European derivatives clearing business ever since June 2016, when Britain voted to leave the EU.
The basics of clearing
Clearing houses are an intermediary between derivatives buyers and sellers, and they step in if one side can’t complete the trade. Regulators have pushed for more business to be handled by clearing houses since the financial crisis to make the financial system safer and more transparent. And the European Union wants to ensure it maintains access to this business once Britain leaves the bloc. It wants the euro clearing business be moved to EU territory or, if it remains in London, be subject to European supervisory authorities.
With signs growing that Britain is headed for a hard Brexit, a relocation is looking increasingly likely. To prepare themselves for the change, banks that previously cleared most of their euro derivatives trades via London’s Clearnet are shifting some of them to Eurex.
But Brexit fears aren’t the only reason. Financial sources said Deutsche has also been lured by Deutsche Börse’s incentive program. It’s offering a share of Eurex profits and a seat on the supervisory board of Eurex to the 10 banks that are most active on its clearing platform.
In the first quarter, the most active Eurex users included Deutsche Bank, JP Morgan, France’s BNP Paribas as well as Commerzbank and LBBW. “The partner program played an important role in Deutsche Bank’s decision,” said a financial source.
Short-term vs. long-term
Deutsche Bank declined to comment on that, but a spokesman for the Frankfurt-based bank said: “With a view to our competitors, we want to expand our market share in the trade with euro derivatives and use the advantage of our location.”
London’s financial district isn’t quaking in its boots just yet. Shifts in euro clearing were to be expected given the lack of clarity over Britain’s future relationship with the EU, especially as the EU and European Central Bank were taking a tough line on euro clearing, said Neil Wilson, chief market analyst for Markets.com.
London financial newspaper City AM wrote in a commentary that while the increases in German clearing volumes were high in percentage terms, they were not in absolute terms. Deutsche Börse had attracted clearing volumes for short-term derivatives but London continued to dominate with long-term products, the newspaper wrote.
It has a point, because a large part of the Eurex clearing volume is for interest swaps with maturities of three to six months. Banks could shift these trades back to London relatively quickly if Brexit terms allow them to.
That’s why Eurex Clearing plans to attract longer-term derivatives and is wooing insurers and pension funds that typically opt for contracts with maturities of five to 15 years.
Yasmin Osman is a financial editor with Handelsblatt’s banking team in Frankfurt. Andreas Kröner covers financial services for Handelsblatt in Frankfurt. Kerstin Leitel is a correspondent for Handelsblatt in London. To contact the authors: firstname.lastname@example.org, email@example.com and firstname.lastname@example.org