LSE Stresses Global Clearing

Shanny Basar

Xavier Rolet, group chief executive of the London Stock Exchange Group, stressed that the group operates authorised clearing houses across multiple jurisdictions around the world as euro derivatives clearing may have to move from London to the European Union.

Euro clearing may be forced to relocate as the UK has voted to leave the EU but LCH, owned by the London Stock Exchange Group, is the largest global clearer of interest rate swaps. The European Central Bank has previously tried to force euro clearing to move away from London into the Eurozone but lost a court case before the EU General Court in 2015. After Brexit the UK may not have the ability to bring a similar case at the EU court.

Xavier Rolet, CEO, LSEG

Rolet said in a presentation at a group investor day today: “LSEG operates authorised clearing houses in the UK, US and Eurozone with global and domestic licences, operating within and across multiple jurisdictions around the world.We are well positioned to serve our clients, wherever our clients choose to clear.”

He continued that SwapClear is directly licensed to clear in jurisdictions including the EU, UK, US, Australia, Canada, Japan, Hong Kong and Switzerland. In addition, LCH is authorised and supervised by CFTC, the US regulator, and is the only European-based central counterparty qualified to clear the futures commission merchant market in the US.

At the IDX FIA conference in London last week Daniel Maguire, chief operating officer at LCH Group and global head of rates and FX derivatives, also stressed that the clearer was authorised in many jurisdictions.

“Direct supervision is not new to LCH,” said Maguire. “We are pleased that the European Commission has said this is one of the options being considered as there is a need to keep the global market together.”

Eric Mueller, chief executive of Deutsche Börse’s Eurex Clearing said at the IDX FIA conference that after Brexit, there will need to be a change to oversight of CCPs. He said: “The European Central Bank has concerns about liquidity and a default situation.”

The FIA also said in a letter to the European Commission last week that it acknowledged the importance of protecting financial stability, but that the forced relocation of euro-denominated cleared derivatives would be the most disruptive and expensive approach to overseeing third-country central counterparties.

Walt Lukken, president and chief executive of FIA, said in the letter:  “Forced relocation would fragment liquidity, increase systemic risk, and raise costs for the end-users that rely on these markets for hedging and managing their exposure to risk. Instead, appropriate safety, soundness, and confidence in clearing could be achieved through enhanced oversight or recognition with far less cost or disruption to markets.”

Last September analytics and research firm Clarus Financial Technology warned that total initial margin requirements could double if clearing of Euro-denominated derivatives is forced to shift from London. Clarus calculated in a blog that initial margin could double from $83bn to $160bn if Euro clearing has to move to the Eurozone.

“FIA believes that the Commission’s suggestion of recognition and enhanced supervision are more effective ways to protect financial stability than forced relocation of the clearing of euro-denominated products,” Lukken said.

Maguire said at the investor day today that client trades in SwapClear were up 27% year on year in the first quarter of this year and there was a 55% increase in the number of clients clearing over the same period.  He said: “Future growth drivers include mandated EU client clearing and extension of non-deliverable IRS to additional Asian currencies (KRW, INR, CNY) to meet global and local client demand.”

In addition, the notional of swaps compressed in the first quarter of this year was 64% higher than any previous first quarter period.

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