European banks downsizing role in client clearing

Capital pressures have seen some European clearing banks unwinding positions and retreating from the business.

A handful of major European banks are significantly reducing their exposures to client clearing of derivatives, as regulatory pressures force banks to rethink the business.

According to latest FCM figures from the US Commodity Futures Trading Commission (CFTC), banks including Deutsche Bank, Barclays and Credit Suisse have dramatically reduced the amount of client segregated assets they hold for clearing.

Deutsche Bank, which at the beginning of 2014 held over $12.5 billion for its listed derivatives clearing business and was one of the top clearing banks in the US at the time, has seen its client segregated assets drop to just over $3.1 billion as of November 2016.

“What we have seen is that there been some unwinding of positions. When we look at CFTC statistics….notably one or two of the European clearing brokers have deleveraged,” says Jamie Gavin, head of OTC clearing for Europe and Asia, Societe Generale.

“We think that is due to sensitivity over certain LDI strategies where they have been very balance-sheet intensive.”

The dominant position European banks once had in the derivatives clearing market has been replaced by US banks such as Morgan Stanley, Goldman Sachs, JP Morgan, and Wells Fargo.

According to a recent report from TABB Group, European banks have become “reluctant change agents” as they look to rationalise the clearing business in the face of regulation.

“Services that once were considered run of the mill have either become chargeable add-ons for clients or are simply checked N/A on the request for pricing,” the report says.

European banks are also struggling to remain competitive as they attempt to grapple stricter capital requirements. The increased cost of running a clearing business has forced banks to re-examine what clients they take on, and has limited their capacity to be competitive.

“There will be some difficulty for end-clients to find a clearing broker. Regulators need to help us to create more capacity in the market by relooking at certain capital rules such as allowing client collateral to offset leverage exposure,” adds Fred Colette, global head of prime brokerage and clearing, Societe Generale.

Certainly, the withdrawal of another FCM would cause alarm bells to ring. Europe has already seen BNY Mellon, State Street, Nomura, and RBS withdraw from the swaps clearing business.

The TABB report suggested further FCM consolidation would add further stress on those existing banks. “The resulting consolidation may finally reach a concerning point in terms of the remaining FCMs having enough capital to support the business,” TABB states.