Costs of moving euro-clearing 'are not theoretical' – Carney

The Governor for the Bank of England warned of higher costs but welcomed the European Commission’s proposal on tighter CCP supervision across the EU.

The Governor for the Bank of England has warned the potential for higher costs across Europe should clearing move from London ‘are not theoretical’.

Mark Carney explained at Mansion House today the move would cause fragmentation of liquidity and markets by jurisdiction or currency, reducing the benefits of central clearing altogether.

“Fragmentation is in no one’s economic interest. Nor is it necessary for financial stability. Indeed it can damage it,” he said.

“Fragmenting clearing would lead to smaller liquidity pools in CCPs, reducing the ability to diversify risks and diminishing resilience. And higher costs would reduce the incentives to hedge risks, increasing the amount of risk that the real economy would have to bear.”

He added the costs of moving clearing are ‘not theoretical’ and referred to industry estimates of €22 billion per year costs to firms in the European Union, which would ultimately be passed on to European households and businesses. 

Buy-siders have also warned 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.

Speaking at an event hosted by The TRADE, 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.

Carney welcomed the European Commission’s CCP proposal announced last week and said it could act as a foundation to build robust cross-border arrangements for the supervision of CCPs.

“Coming to an innovative, cooperative and reciprocal agreement on central clearing would promote competitive financing in the euro area and maintain the resilience of the UK and global financial systems,” he added.

The European Commission confirmed last week it would tighten the supervision of CCPs within the EU and plans to hand ESMA the authority to relocate those considered systemically important.