The plumbing of the financial system that is critical to the functioning of eurozone government bond markets could justify “heightened oversight” from the region’s central banks and regulators, the LSE said in a submission to the European Commission.
In a response to proposals from the EU, the company, whose clearing house, LCH, is at the centre of a political tussle over future City business, indicated that supervision of the cash market for bonds and repo, or repurchase agreements “could form part of a specific discussion”.
The repo market is a crucial source of short-term funding and collateral for banks, helping them meet margin requirements for derivatives trades. The European Central Bank also sees the market as a critical mechanism for transmitting monetary policy.
However, the LSE also argued that clearing of interest rate swaps, which has ignited a politicised transatlantic battle since the UK voted for Brexit in 2016, was not of systemic relevance to the EU and could be supervised within existing frameworks.
Clearing has become a flashpoint as UK clearing houses process about 90 per cent of the world’s euro-denominated derivatives and around half of European banks’ cleared repo business. A clearing house stands between parties to a derivatives trade, managing the risk to the market if one side defaults.
“Asset classes should be treated in a completely different manner and call for different supervisory solutions,” the LSE told the commission. [...]
The LSE also acknowledged that repo and cash debt markets have close ties to the government issuing the debt. “Clearing houses could consider how to accompany safely the possible desire of the market to clear debt in its issuance location,” the company, which also owns the eponymous stock exchange, noted. [...]
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