Exclusive: Top banks wanted to explain why they are still processing euro swaps in London


© Reuters. FILE PHOTO: Canary Wharf is located in London


By Huw Jones

LONDON (Reuters) – Europe’s top banks have to justify why they don’t have to move billions of euros worth of euro-denominated derivatives clearing from London to the European Union after Brexit, as an EU document from Reuters showed on Tuesday.

UK clearers have EU permission to continue clearing for EU clients until mid-2022 to give banks time to move their euro positions to the continent. However, the change was slow.

Banks are asked to provide detailed views on the move of euro derivatives positions from London on Friday at the first meeting of a new European Commission working group on the shift in euro clearing.

“The current exposure to UK Central Counterparties (CCPs) raises a number of issues for the EU that should be addressed by reducing the EU’s exposure to UK CCPs,” the European Commission said in a questionnaire sent to banks.

The EU wants to deepen its capital market to reduce dependence on the City of London after the UK left the single market.

EU policymakers and the European Central Bank, which regulates top lenders, have long wanted euro clearing to move from London to the single currency area, where it can be monitored directly.

The LCH branch of the London Stock Exchange in London still handles the majority of euro swap transactions, although trading in swaps has shifted from London to platforms in the EU and New York since December 31st.

“The aim of this discussion is to ensure that the Commission is aware of all possible obstacles, obstacles and opportunities,” says the document prepared for the meeting.

Banks are asked to say what types of derivatives they consider “easiest to clear” in the UK with an EU clearer, which is a sign of a potentially targeted approach.

“Participants are asked to consider the possibility of converting transactions that have already been processed in UK CCPs into another CCP in order not to go through the market,” the document says.

Banks, who are also asked to explain why some products are difficult to move, say that dividing markets would reduce the margin or cash savings over deals that result from netting a large number of transactions.

“Isn’t there already market fragmentation in clearing that has no negative impact on the market?” the document says.

It will ask for details about the duration of the trades they hold with LCH and the conditions necessary to move positions from one clearer to another.

“Several third-party providers offer intermediary services. Why aren’t they used more often?” it asks.

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