LCH under the Brexit microscope


LCH is set to face the greatest impact from Britain’s vote to leave the EU, and may have to rethink the location of its euro-denominated swaps clearing business, according to industry experts.

LCH’s SwapClear is the largest clearer of euro-denominated interest rate swaps. With the result of the EU referendum and Britain’s withdrawal from the EU, it could be forced to move its operations in the coming weeks.

“We are expecting LCH to be hit [by the EU referendum] the most,” according to one head of OTC clearing at a European bank.

The issue could be further complicated for LCH if there is a divergence between UK and European regulators over derivatives clearing.

“The big issue for CCPs based in the UK is that their recognition in overseas jurisdictions is on the basis of their compliance with EMIR. This could change if the UK moves to a different regime, and would likely require reauthorisation,” says Christian Lee, head of risk & clearing, at consultancy Catalyst.

“On this basis it would not be surprising if some of the UK based CCPs were considering relocating some or all of their business to Europe.”

LCH certainly faces a high level of uncertainty, as the FCA or Bank of England will have to completely renegotiate every piece of European regulation in place.

“How will LCH fit into the fragmented regulatory landscape? Recall the tortuous negotiations between the US and EU over recognising each other’s CCPs?” says Craig Pirrong, professor of finance at Houston University.

Furthermore the resignation of Jonathan Hill from the European Commission, who was championing a lessening of certain requirements for derivatives, does not help the situation for LCH, according to Virginie O’Shea, research director at Aite Group.

“What happens now depends on who takes the lead at the EC and how collaborative and cooperative the UK is with the Commission is in future, and vice versa,” she says.

A spokesperson for LCH declined to comment.

A solution between the Bank of England and European regulators is not unfeasible, given the cross-border nature of derivatives trading and clearing. How a Brexit could impact euro-swaps clearing activity at LCH is unknown at this point.

“Ultimately the open interest per contract per currency will flock to the clearing house that makes the most sense from a margin and collateral efficiency standpoint in terms of its overall activity, given clearing these days is very much an economies of scale game,” says Hirander Misra, CEO, GMEX Group.