The two British banks are among the top ten users of an incentive scheme that the German exchange operator began in January to entice more derivatives clearing - a process that manages the risk of contagion if one party to a trade defaults - to financial hubs in the eurozone from its historic centre in London.
The business of clearing derivatives has become an unlikely battleground for the future of capital markets after the UK leaves the EU, with European governments keen to secure oversight of the regulation of interest rates derivatives denominated in euros. Olaf Scholz, Germany’s finance minister, last week called for London’s euro clearing business to be relocated to the eurozone.
Under the terms of the incentive scheme, banks, asset managers and market makers can enjoy a share of the profits Eurex, a division of Deutsche Borse, makes from clearing. The five most active users will also secure seats on the supervisory board of Eurex, a position that gives them a say in how clearing works.
JPMorgan, BNP Paribas, alongside the German trio of Deutsche Bank, Commerzbank and Landesbank Baden-Württemberg were the five heaviest users of the scheme in the first five months of the year, Eurex said on Tuesday. UniCredit, DekaBank and Bank of America Merrill Lynch rounded out the top ten.
The financial crisis made the clearing industry a priority for regulators keen to contain the threat of contagion in the derivatives market. Everyone from companies to banks use derivatives to manage their exposure to interest rate risks, and clearing houses sit between two counterparties to a trade.
Despite the success of the scheme, LCH, which is owned by the London Stock Exchange, still dominates the clearing of euro interest rate swaps. Eurex has cleared a notional €7tn in swaps this year compared with the €100tn processed by LCH.
Some executives cautioned that Eurex has a long way to go until it can truly challenge LCH. Amir Khwaja, chief executive of Clarus Financial Technology, a UK data provider, said the majority of the business that Eurex processes is in short-dated forward rate agreements. “It is a market that is dominated by banks, and done automatically to hedge risks in interest rate swaps books,” he noted. [...]
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