Markets: London's Future
Deutsche Bank has moved almost half its euro clearing activities from London to Frankfurt, in the latest sign of European cities winning financial business from the UK ahead of Brexit.
Germany’s largest lender said that its overall risk exposure to euro-denominated derivatives cleared in Frankfurt in recent months had risen to roughly the same level as those cleared in London. Deutsche Bank does not disclose its clearing volumes but says it is one of the five largest clearers of interest derivatives.
The move has provided a significant boost to Deutsche Börse’s ambition to steal business from LCH after Britain leaves the EU in March next year — six months ago, Deutsche Bank’s euro clearing operation was almost entirely done in London.
The clearing of euro-denominated interest rate derivatives has become a key Brexit battleground for regulators, banks and exchanges. In the past, London’s LCH was the undisputed leader for clearing euro-denominated interest rate swaps, processing up to €1tn of notional deals a day.
“To minimise risk for financial stability, it is indispensable that [the clearing of euro-derivatives] is subject to strong regulation and supervision in full conformity with EU standards,” said Olaf Scholz, German finance minister, last month, suggesting Frankfurt would be the natural place.
Deutsche Bank has been one of the early adopters of Frankfurt-based clearing. “Our outright risk positions at LCH and Eurex [in euro-denominated derivatives] are pretty similar these days,” said Jürgen Feil, head of rates for Germany at the bank.
Hubertus Väth, chief executive of marketing group Frankfurt Main Finance, said that moving euro clearing from London to Frankfurt was “on top of our priority list from the very first day after the Brexit referendum”.
While only a few hundred jobs are directly linked to derivatives clearing, Mr Väth said the indirect effects would be substantial, adding that Frankfurt had lost most of its trading rooms to London over the past three decades: “This was the best chance to bring them back.”
London Stock Exchange Group, which owns LCH, has warned that as many as 100,000 jobs could leave the City if London loses its status as the euro clearing hub.
But at Deutsche Bank, the shift to Frankfurt-based clearing has not led to relocating jobs. “It’s the same London-based person who clears a transaction. We’re just using a different clearing house,” said Stefan Hoops, the bank’s global co-head of institutional and treasury coverage.
European policymakers are calling for direct regulatory oversight after the UK’s departure from the EU, as so-called central counterparty clearing houses directly affect financial stability.
In October 2017, Deutsche Börse subsidiary Eurex launched an incentive scheme that encouraged banks to switch from London to Frankfurt. So far, 29 banks have signed up, with Deutsche Bank, JPMorgan, Commerzbank, BNP Paribas and Stuttgart-based public lender LBBW being the heaviest users. The four other lenders declined to comment.
At €3.8tn, the notional clearing volume in the second quarter of 2018 was 10 times higher than a year earlier, raising Eurex’s market share in the euro-denominated interest rate derivatives to around 8 per cent.
Theo Weimer, Deutsche Börse chief executive, is aiming to control at least a quarter of the market for clearing euro interest rate swaps from London by 2019.
“We are pleased with the first six months as volumes are growing,” said Erik Müller, chief executive of Eurex Clearing. Yet while Eurex’s revenue from OTC derivatives clearing has almost tripled, it accounted for just 2.6 per cent of overall revenue.
So far, Frankfurt has attracted mainly short-dated derivatives that are heavy in volume but low on risk, a senior derivatives trader at a European bank pointed out. “Long-dated interest swaps with a maturity of five to 20 years is still primarily cleared in London,” said the banker, adding that he expected this to change over time in favour of Frankfurt.
Forward rate agreements are short-dated contracts that allow parties to protect themselves against changes in interest rates and often involve large notional sums of billions of euros.
For clients dealing with derivatives in different currencies, LCH can still be the better choice, said Mr Feil. However, for those dealing with euro-denominated products such as interest rate swaps and euro-Bund futures, Eurex is often the better choice.
Copyright The Financial Times Limited 2018. All rights reserved.
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