Euro-clearing move could force US to follow suit with dollar, says expert

Head of ICE Benchmark services believes US could examine its own clearing arrangements in wake of Brexit move.

An industry expert believes the US could make a shock move to force US dollars to be cleared domestically if European regulators relocate euro clearing within the EU following Brexit.

The shift would be a huge operation considering around 90% of US dollar denominated interest rate swaps are cleared outside the country.

However, Finbarr Hutcheson, president of the ICE Benchmark Administration, believes “it’s not beyond the realms of possibility” if the EU insists on euro transactions settling within the EU.

“Trying to force euro settlement within the eurozone, the logical reaction from the US would be to do something similar with the dollar,” he said at the Futures Industry Association (FIA) Expo in London. “I hope that’s not the situation because that’s very concerning.

“What the EU is doing is trying to make the euro less international than the renminbi, for example, but that really cannot be what they want to do. The EU is contemplating actions which may do harm to themselves.”

In March, the acting chairman of the US Commodity Futures Trading Commission, Christopher Giancarlo, said “what Europe chooses to do on the supervision of CCPs undoubtedly will inform the evolution of US regulatory policy for cross-border swaps clearing”. 

As the debate about the relocation of euro clearing rumbles on, the derivatives body, FIA, has issued the latest in a string of warnings to the European Commission, this time stating a forced relocation of euro clearing would be “disruptive and expensive”.

Clearing euro-denominated products has been focused in London, despite the UK not being part of the single currency bloc. But with the UK set to leave the EU in 2019, some European politicians have called for euro clearing to be moved to another EU country.

“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, at The TRADE’s Future of Post-Trade Event in May.

“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.”

The location of euro clearing will be an on-going debate as Britain negotiates its exit from the EU over the next two years. While the focus will be on euros, ICE’s Hutcheson believes a move from the US would be “logical” and “concerning”.

“It seems crazy to contemplate, but if we did it with the EU why wouldn’t they do it in the US?”