23 November 2017

The Economist: In a pre-Brexit skirmish with the City, Eurex takes on LCH

Though volumes on Eurex are rising fast, its task looks hard. Central counterparties (CCPs) such as LCH and Eurex allow contracts to be offset against each other, reducing the overall exposure of banks and their clients—and allowing banks to economise on equity. Monopoly is natural: the deeper and more liquid the pool of contracts, the better. Bankers say clearing on LCH tends to be cheaper than elsewhere.

Three factors, Eurex hopes, will also help lure business to Frankfurt.

One is that banks and their clients want an alternative liquid market, and that they will value choice more highly as regulations require more derivatives to be cleared through CCPs, such as LCH and Eurex. The second is the fear, however remote, of the catastrophic failure of a single, dominant CCP. Because Eurex has a banking licence, it would be able to call on the European Central Bank (ECB) quickly should disaster strike. The third is Brexit. Long before Britain voted to leave the EU, the ECB attempted to force euro-derivatives clearing into the euro area. EU judges thwarted it in 2015, but it may try again. In June it proposed amending its statutes to give it explicit power to supervise clearing houses, including those outside the EU. The European Commission also suggested that “systemically important” clearers could be obliged to make their home in the EU.

Though forced relocation looks unlikely, no one can yet be sure. It would be more of a blow to jobs in London than to LCH itself, which has an arm in Paris. But it does banks no harm to join Eurex’s programme. They already use Eurex anyway, if on a small scale; if their clients want to use it more, so must they. Eurex, says a banker, is offering a “free option”.

Full article on The Economist (subscription required)

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