Brexit Benefits

Offering a Piece of the Pie

The London skyline would look better without the pall of Brexit. Source: Reuters

If imitation is the sincerest form of flattery, then Deutsche Börse’s Eurex unit is full of heartfelt compliments for LCH as it attempts to lure some of the London clearing house’s business to Frankfurt. The flattery is understandable since the business includes euro-denominated interest rate swaps with a nominal value of €469 billion ($522.3 billion). Investors use the swaps to guard against rate swings and the LCH has a near-monopoly — it accounts for 95 percent of all the euro-denominated, over-the-counter swaps.

However, European regulators and politicians think the business should be relocated to the continent once the UK leaves the EU. LCH already has a Paris division but Eurex is hoping to pull them to Frankfurt with an offer to good to pass up.

The German clearing house has worked on an agreement over the past several months with the 10 largest clearing customers to give them a share of the profit and a voice in decision-making should they agree to move. It’s trying to mirror the benefits banks get from LCH, in which many have direct stakes. “This market-oriented initiative serves the customer and strengthens the financial market as a whole, in that it promotes choice and competition,” said Eurex chief Eric Müller.

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Who would not want to clear here in Frankfurt? Source: Bloomberg

It’s no surprise Mr. Müller has the backing of local politicians and but he’s fighting an uphill battle. Clearing houses are the middlemen in trades and often must cover an open position by a bank on one side of the trade. In exchange, the clearing house demands security and banks would rather leave security deposits with a single clearing house rather than a network of houses. Georg Baur at the Federal Association of Public Banks in Germany said that if the clearing can no longer be in London, all banks ideally should “decide in lockstep in which place euro-clearing should take place in the future.” And preferably in Frankfurt.

Easier said than done. Market observers say Eurex’s early action is important even though it’s still unclear which trading banks will be the first to make a move toward Frankfurt. It’s not only trying to line up German banks like Deutsche and Commerzbank, it’s also wooing big international players like JPMorgan Chase, Bank of America, Citibank and Morgan Stanley.

The preliminary pact might give Eurex a leg up in the race for the business, but most banks would prefer to keep the clearing for euro-clearing where it is – in London. That will depend on the politics of the Brexit negotiations over the next several months. For the moment, it is still an open question whether the clearing can stay in London and be supervised there by EU authorities or whether it has to be moved to an EU member state.

Andreas Kröner is a financial correspondent for Handelsblatt in Frankfurt. To contact the author:

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