London’s LCH has applied for equivalence with Europe’s regulatory watchdog to carry on doing business in the continent in a no-deal Brexit situation, while also applying to the Bank of England as an overseas derivative clearer.
The application follows the recent decision by the European Commission to grant a 12-month equivalence pass to non-EU clearing houses in the case of a “no-deal” Brexit.
The European Securities and Markets Authority (ESMA) has begun its review of UK clearing houses and central securities depositories (CSDs) to approve their equivalence applications.
The decision by the Commission ensures that trillions of euros in cross-border derivatives transactions would not be disrupted in a no-deal Brexit.
In a notice to clients, LCH stated: “LCH Ltd intends to continue to offer all clearing services for all products and services to all members and clients after 29 March 2019.”
LCH added the Bank of England had also accepted the application for its Paris-based clearing house, LCH.SA, for recognition as a non-UK central counterparty (CCP).
ICE Clear Europe, which is also based in London, has also applied to ESMA, stating: “We see no reason to withdraw offering our services in the European Economic Area at this time.”
The London Stock Exchange Group (LSEG), which is the majority owner of LCH, laid out plans for a no-deal Brexit in August, which included potentially establishing new EU entities and applying for authorisation to operation within the EU.
LCH clears more than 90% of interest rate swaps in Europe, however it is facing increasing competition from Frankfurt-based Eurex Clearing, which offers a profit share scheme to attract clearing in euro repo, government bonds and interest rate derivatives.
According to reports from Bloomberg, 16 banks including Deutsche Bank and Commerzbank, had recently tested moving interest rate swap positions from London to Frankfurt, and Union Investment, Germany’s second largest asset manager, is the first European asset manager to close its existing euro-denominated swaps trades at LCH.