Clearing ensures financial market trades are completed even if one side of the transaction goes bust. It is a high-volume, low-margin business but a critical part of market infrastructure. London’s leading role in the clearing business has helped to cement its status as Europe’s top financial centre.
Other European centres, such as Frankfurt, keen to claw back a chunk of this business, saw Brexit as a chance to reduce London’s grip on clearing euro-denominated trades.
But Deutsche Boerse’s Eurex Clearing, considered the strongest candidate to take business from the London Stock Exchange’s clearing division LCH, said its euro clearing had grown more slowly than expected due to delays in regulation changes, the COVID-19 pandemic and a broader reticence by banks to shift from London.
“There is a slower growth path than we initially had expected for the second half of this year primarily due to COVID-19 and its implications, but everything is going in the right direction to achieve our goals,” Eurex Clearing board member Matthias Graulich told Reuters.
Eurex said it accounts for 19 trillion euros ($22.67 trillion) of the total market of 100 trillion euros in notional outstanding value in euro interest rate derivatives and forward contracts, with LCH taking the rest.
In swaps alone, Eurex has 7.3 trillion euros, or 14% of the market, compared with 45.8 trillion euros at LCH. Eurex has a goal of reaching an overall euro clearing target of 25 trillion euros by the end of 2020.
“It is extremely difficult to say where we are on the journey to achieve our goals by 31 Dec, a year-end is not a magic date if you are building a business, it is more relevant that the trajectory is up and we make month-by-month progress,” Graulich said.
He said a new rule that requires market participants like asset managers to provide margin – a form of deposit – against swap trades for the first time will lead to greater use of Eurex by new customers.
But the rule has been delayed by a year to September 2021 due to COVID-19.
Graulich also said several banks had put off plans to close swaps positions in London and reopen them in Frankfurt when the pandemic was disrupting markets and while many traders were working from home.
The LSE said there had been no discernible shift in clearing from London.
Lawyers said banks will not move positions from London to Frankfurt voluntarily because of costs and complexity at a time when they are firefighting the pandemic.
Given the lack of movement, the EU is set to decide in the next few weeks on the length of time it will allow LCH’s clearing of euro swaps for EU customers to continue after Britain’s full access to the EU ends in December.
“It’s very hard to see why the EU is playing around with a time limit because Catch 22 remains in full force with banks not moving positions unless ordered to,” said Simon Gleeson, a financial services lawyer at Clifford Chance.
There is a political cost for Britain to maintain EU access for its financial services industry – the Bank of England will have to allow EU securities watchdog ESMA to jointly supervise LCH.
The BoE has said “multiple hands on the wheel” in a crisis could create confusion. The Bank said this month that clarity was needed by the end of September to avoid market disruption.
ESMA said it was working to ensure timely access decisions.
Some loss of London’s clearing business to the EU is seen as inevitable once the pandemic has passed.
Graulich said the EU wants power over business like euro clearing and that the amounts of business cleared inside and outside the EU will affect decisions on access for Britain.
“The EU needs to develop its own financial market eco-system with Brexit now ultimately happening. Taking a five to ten year perspective, it is success critical for the EU.”