February 9, 2017 / 4:19 PM / 7 months ago

DERIVATIVES-Deutsche shuts US swaps clearing

LONDON, Feb 9 (IFR) - Deutsche Bank is shutting down its US over-the-counter swaps clearing business, but plans to move some of its most active US clients over to the bank’s European operations, according to people familiar with the matter.

The clients could continue to clear their swaps through London-based LCH SwapClear and Frankfurt’s Eurex.

The German dealer will withdraw from US OTC clearing with immediate effect but remains committed to its listed derivatives clearing business in the region and will remain an active foreign exchange prime broker. The bank had no intention of retreating from European OTC clearing, where it remains a top-five player with more than 50 clients.

Deutsche Bank’s decision comes in response to a crippling regulatory capital regime that has made OTC swaps clearing a balance sheet-intensive operation for all dealers.

The rules make it particularly difficult for non-US banks that clear their clients’ swaps through US clearinghouses, such as CME, as US rules require foreign banks to hold capital in an intermediate holding company.

Once considered a potential cash cow stemming from sweeping derivatives reforms that aimed to push large parts of the US$544trn swaps market into clearinghouses, client clearing has become a thorn in the side for many dealers.

BNY Mellon, Nomura, RBS and State Street have all thrown in the towel in recent years, while Credit Suisse and Barclays outsourced some clearing activities to a third party in an attempt to cut costs.

Regulators, including Bank of England governor Mark Carney, have raised concerns that current capital rules, which treat client margin held against cleared swaps as a leveraged asset on balance sheets, are out of step with reforms to encourage more participants to clear their derivatives trades.

Deutsche Bank’s retreat is a further reduction in its US OTC clearing activities as part of the Strategy 2020 plan, which aims to simplify operations and refocus resources on less capital-intensive activities.

At the end of December, Deutsche Bank Securities held US$461m of segregated customer collateral against cleared OTC swaps, CFTC data show. That left the bank outside the top 10 providers for US swaps clearing.

The bank’s US OTC client roster is understood to be significantly smaller that its European operation, with the majority of activity coming from a handful of players.

Citigroup, Credit Suisse, JP Morgan and Morgan Stanley lead in US swaps clearing, with each reporting customer swap margin of over US$10bn as of last December. (Reporting by Helen Bartholomew)

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