LSEG Highlights Growth In Clearing
The London Stock Exchange Group increased revenues from clearing by a fifth in the third quarter as it looks to extend its temporary equivalence with the European Union after the UK leaves the trading bloc.
— London Stock Exchange Group (@LSEGplc) October 18, 2019
The group said in its third quarter results that income at LCH, its clearing house, rose 19% to £197m ($255m), driven by 22% revenue growth in OTC clearing and strong volumes at SwapClear.
David Warren, group chief financial officer, said on the results call this morning that growth in OTC clearing was very strong.
“In addition to SwapClear, the ForexClear business is continuing to develop over time and we are pleased with progress,” added Warren. “Growth is due to economics as the uncleared margin regulation has increased the cost of collateral.”
This week LCH announced the launch of the clearing of foreign exchange forwards, adding to the FX options and non-deliverable forwards that it already clears. NDFs are derivatives that are used to hedge or speculate against currencies where exchange controls make it difficult for overseas investors to make a physical cash settlement, for example, the Chinese renminbi.
— LCH (@LCH_Clearing) October 16, 2019
Warren said: “We can clear a wider range of FX products. Adding forwards is a significant development that we have been working on for a long time.”
From next year LCH will be part of a new post trade division alongside Monte Titoli and CC&G, the Italian post trade businesses, and UnaVista, the trade reporting unit that currently reports as part of the information services division.
Daniel Maguire, chief executive of LCH Group, will lead the division as group director, post trade, in addition to his current responsibilities.
David Schwimmer, chief executive of LSEG, said on the results call that the new division will ensure greater group-wide collaboration and with a view to developing commercial activities for the benefit of customers.
“We are committed to operating all our businesses on an open access basis in partnership with customers and stakeholders,” added Schwimmer.
Since the Brexit vote there has been debate over whether UK clearers and central securities depositories would be granted equivalence by EU regulators in order to be able to continue to operate in the trading bloc.
In February this year the European Securities and Markets Authority granted temporary equivalence to three UK CCPs – LCH, ICE Clear Europe and LME Clear – and the UK CSD in the event of a no-deal Brexit, so they can continue to serve EU-based clients and minimise disruption to financial markets. However, this temporary recognition expires on 30 March 2020.
Schwimmer said the exchange expects this equivalence to be extended.
“The EU has recognised the systemic importance of extending equivalence,” said Schwimmer. “However we do not expect any decision until after October 31.”
The UK is due to leave the EU on October 31.
The Association for Financial Markets in Europe has warned that the industry needs confirmation of the extension of equivalence.
AFME said in a report in July: “Unless certainty is provided as to the extension of recognition, UK CCPs might be required to start off-boarding processes for EU27 members by the end of 2019. We note the European Commission’s recent statement that it would consider whether adjustments are needed to contingency measures to take into account the new timeline following the extension to Article 50 and encourage the European Commission to do so in this instance.”
European regulators are also due to define a new process for determining equivalence for countries outside the EU.
“This is of pivotal importance given the significant threat that the start of an off- boarding process by UK-based CCPs would pose for EU financial stability,” added AFME.
Schwimmer continued that good progress is being made on the acquisition of Refinitiv. In August LSEG said it has agreed definitive terms with a consortium, including Blackstone and Thomson Reuters, to acquire Refinitiv for $27bn.
“We have begun the process of obtaining regulatory approval,” he added. “We are on schedule to complete in the second half of 2020.”
The group has also formed the integration management office comprised of senior leaders from LSEG and Refinitiv. The office will be led by David Shalders, who is joining next month as chief integration officer. Shalders was most recently group operations and technology director at Willis Towers Watson, having led the integration of Willis and Towers Watson.
In addition, Warren said he intends to retire and step down from the board by the end of next year. He will continue in his current roles until the close of the Refinitiv deal to ensure a smooth transition. LSEG will undertake a global search, which will be led by the board’s nomination committee.
Proposals do not create a comprehensive framework for U.S. customers to access foreign cleared markets.
This helps establish €STR as the new benchmark risk-free rate.
Industry says without an extension, EU clearing members could face trouble in UK CCPs.
The current temporary equivalence expires on March 30, 2020.
Eurex Clearing’s direct access model for the buy side gained its first EU-domiciled bank as a member.