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20 December 2018

Financial Times: US creates Brexit market safety net with German clearing permit

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US derivatives markets regulators have offered an olive branch to Europe in their stand-off over clearing oversight, allowing Deutsche Börse to handle trillions of dollars of deals from big American asset managers.

The Commodity Futures Trading Commission will hand out a permit to the German group’s Eurex exchange on Thursday, according to officials at the watchdog.

The move would also provide an extra safety net for US institutions nervous about the UK’s departure from the EU, they said. American banks will be able to funnel trades from hedge funds or big institutional investors such as Pimco and BlackRock via Frankfurt. After recognition, several banks including Citigroup, are likely to connect to Eurex in coming weeks.

The US authorisation will deepen competition between Eurex and the UK’s LCH in the politically sensitive world of clearing houses. The entities are intermediaries that sit between counterparties to absorb risks of a default spreading through the market.

Global authorities see them as a crucial element in monitoring risk for the financial system. But the UK’s departure from the EU in March has pitched the heavyweight regulators in Europe and the US into a stand-off about future oversight of clearing houses, because London is the global hub for the $500tn business. Companies use swaps worth billions of dollars to hedge and speculate on likely moves in interest rates.

EU regulators want to write more assertive standards to gain influence abroad, a stance that has jarred with US authorities. The CFTC stressed its authorisation of the eurozone’s biggest clearing house was based on existing agreements, and could be rescinded later.

“It will give US customers a third option [for clearing] after the US and UK,” said Eric Pan, director of international relations at the CFTC. [...]

Full article on Financial Times (subscription required)

© Financial Times

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