Relocating euro clearing will damage liquidity, warns ICE

Moving clearing out of London would raise costs for banks, according to ICE working paper.

Intercontinental Exchange (ICE) has warned that banks will be hit by a lack of liquidity if clearing of euro-denominated derivatives is relocated from London.

Following the UK’s vote to leave the EU, fears over London’s position as the global centre of euro-denominated derivatives have arisen.

In a working paper released by ICE, it states that a forced relocation of derivatives clearing would have a damaging effect on banks.

“Through a forced (re)-patriation of euro-denominated instruments EU banks may be deprived of access to liquid trading and clearing facilities, and may be prevented from accessing directly those non-EU facilities supported by global banks and infrastructure,” says ICE.

ICE warns that the relocation of euro derivatives clearing from London would increase costs for both banks and customers, while also potentially raising initial margin calls.

“This is because the existing margin pool benefits from portfolio efficiencies that would be unavailable if the euro-denominated portion were disaggregated,” ICE adds.

London currently accounts for 75% of euro-denominated derivatives transactions at an average daily value of $573.64 billion notionally. It also home to ICE’s European clearing house, as well as LCH and CME Clearing Europe.

Market participants warned at ISDA’s MiFID II/Dodd Frank conference last week over further fragmentation in the global swaps market if a third liquidity pool is created as a result from Brexit.

ICE recommends that the UK streamlines the process for foreign firms to access its wholesale markets as a means to avoid creating barriers for cross-border companies.