Forcing euro derivatives clearing to move from London to the European Union would bump up costs for customers and put EU firms at a competitive disadvantage to international peers, the London Stock Exchange Group argued in a note to clients.
The EU is studying how trillions of euros in interest rate swaps positions could be shifted from LSEG’s LCH clearing arm in London, where the bulk of the global market is cleared, to rival Deutsche Boerse’s Eurex in Frankfurt.
Britain’s access to the EU financial market was largely severed after Brexit fully took effect on Dec. 31, 2020 and LCH has permission to serve EU customers only until June 2022.
EU officials say they want full sight of large-scale activity by EU regulated banks and asset managers in order to monitor any potential threats to the bloc’s financial stability.
“Restricting access to the EU economy and the euro would place EU firms in competitive disadvantage against their peers and would also increase risk to financial stability both in the EU and more widely,” LSEG said in a note issued on Friday.
LCH is already directly supervised by the EU securities watchdog ESMA, LSEG added.
Some industry officials fear mandatory relocation could push euro clearing to New York in the same way as EU curbs has done to trading in euro derivatives.
“LCH fully shares the concerns raised by our customers: regulatory-driven market fragmentation will not produce any significant benefits either to market participants, financial stability or to national economies,” LSEG said.
EU companies accounted for only 27.1% of euro-denominated interest rate derivatives clearing volumes at LCH in London in 2020, with 72.9% coming from non-EU firms, LSEG said.
This illustrated the international use of the euro and the need for EU firms to access international clearers to hedge their risks in euros as well as in other non-euro currencies, it added.
The European Central Bank has powers to require LCH to open a deposit account with it to give the central bank more oversight over the clearer’s payment flows in euros, LSEG said.
“LCH Ltd is fully supportive of this requirement,” LSEG said.
Photo: EPA-EFE/ANDY RAIN