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Euro Clearing Competition Debated

Traders Magazine Online News, February 16, 2018

Shanny Basar

London has the combination of factors needed for a cutting edge in clearing euro-denominated derivatives according to a new report while Germany’s Eurex Clearing claimed an increase in market share last month.

The European Union has proposed that systematically important clearing houses that clear euro derivatives have to be located in the trading bloc. The majority of euro interest rate swaps are cleared by LCH, which is owned by the London Stock Exchange Group, and the UK is leaving the European Union next year.

The Brexit unit of The Institute of Economic Affairs said in a report, London’s Global Reach and the Half a Trillion Dollars Equity Prize, that three quarters of euro clearing takes place in London and one tenth in Paris. In addition, euro, sterling and yen derivatives are routinely cleared in the US.

Economist Dr Gerard Lyons said in the report: “Economic and commercial realities determine where the market goes, not regulators in Brussels. The media often gives the misleading impression the EU could decide if the market will move. It cannot.”

Lyons continued that if the EU forces relocation, this might be seen as protectionist as clearing of euro derivatives could not happen in North America or Asia, and the US could take retaliatory action.

“London is where the liquidity is, where multiple global currencies are cleared and where banks can make effective use of their capital,” he added. “In Paris, or Frankfurt, liquidity would be lower and bid-ask spreads subsequently higher.”

Eurex Clearing, part of Deutsche Börse Group, reported that the average daily volume cleared in over-the-counter interest rate swaps increased to €35bn last month, versus €5bn last year.

In October last year the clearer introduced a partnership program to share a significant part of the economics of its interest rate swap segment with the ten most active participants. Eurex said the program now has 25 market participants from the US, UK, Asia and Europe.

Erik M ller, chief executive of Eurex Clearing, said in a statement: “We observe an increasing number of banks now quoting the same spread for Eurex Clearing and LCH cleared swaps. This provides end clients such as investment funds, insurance firms and pension funds with real choice for the first time.”

However Amir Khwaja, chief executive at Clarus Financial, said in a blog that the derivatives analytics provider’s data does not support the view that Eurex gained market share in euro interest rate swap clearing last month.  

“We see that Eurex’s monthly share in 2017 varies from a low of 1% to a high of 1.8%, with an average of 1.4%,” said Khwaja. “Against this the 1.3% share in Jan 2018 does not stand out at all.”

He said the seven times surge in Eurex volume was due to a rise in clearing of euro forward rate agreements from €5bn in the preceding 12 months to €325bn last month.

Clarus’ total Eurex volume last month was €405.5bn of single-sided notional, which is then doubled and divided by 23 business days to give the average daily volume of €35bn stated by Eurex.

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