Costs to trade euro-denominated interest rate swaps will increase significantly for asset managers if euro clearing is forced to move from London to the EU, buy-siders warned at The TRADE’s Future of Post Trade event.
Panellists highlighted the vast majority of business for euro derivatives comes from outside of the EU, and forcibly moving it away from clearing houses such as LCH would mean dramatic costs.
“Of the entire euro swaps business cleared, only 7% comes from Europe. Would I – as a UK asset manager – move my euros [clearing] to Europe? Not at the expense of the cross-currency correlation I get at the CCP,” said Ricky Maloney, business manager, rates and absolute return desk, Old Mutual Global Investors.
“The suggested costs associated with breaking it [euro clearing] up are crazy. It is tough environment for asset manager right now, any increase in post-trade costs will simply add to those difficulties. Key for the buy-side at the moment is driving down costs where possible, fracturing clearing swap liquidity would be expensive in both margin and capital costs."
Of global swaps volumes, just over a quarter of swaps business is denominated in euros, of that only a quarter is denominated with a European counterparty on one, or both sides, the panel emphasised.
With the majority of all swaps currently cleared at London’s LCH, any attempt to shift this to clearing houses in Europe would just not make sense for the buy-side, according to Barry Hadingham, head of derivatives and counterparty risk for Aviva Investors.
“The reason people go there [LCH] is liquidity and unless that moves there is no reason to go anywhere else. We need that liquidity and we have obligations to our clients to essentially make sure we go to the best place, and right now that is LCH,” said Hadingham.
The panel added that if euro clearing is moved to the EU, it would not only create separate liquidity pools, but also firms would have to deal with separate default funds and could even result in large scale rewrites of legal documents to comply with UK and EU laws.
The LSE’s CEO Xavier Rolet highlighted in an article in The Times that the cost of forcing the relocation of euro clearing from London to Europe could amount to €100 billion.
One of the main concerns European regulators have is for UK CCPs clearing euro-denominated swaps to access central bank liquidity, given that the Bank of England does not have access to euros.