LONDON (Reuters) - Moving clearing to a European Union country from London after Brexit is not a “fait accompli” and the business could be transferred to New York, the CEO of London Clearing House said.
The EU has proposed that foreign clearing houses of “systemic” importance to the bloc should, as a last resort, relocate euro-denominated clearing for EU-based customers to the bloc.
But while 14 percent of LCH’s rates swaps business comes from EU entities, far more is generated by U.S. customers, newly appointed LCH CEO Daniel Maguire said on Wednesday. Interest rates swaps are contracts used by companies to insure against adverse moves in borrowing costs.
LCH already has operations in New York and would therefore not have to start from scratch, making any move less costly.
“So then you have to contemplate the movement of the entire business, and New York is clearly a potential destination as well,” Maguire told a House of Lords committee.
LCH, part of the London Stock Exchange Group (LSE.L), clears more than 90 percent of euro-denominated interest rate swaps.
Under the proposals, if Brussels felt that joint EU-UK supervision of a foreign clearing house proved insufficient it could require the euro-denominated clearing to be moved to an EU centre. Britain is due to leave the EU in March 2019 and UK-based clearing houses would therefore become “foreign”.
“When you start to consider location, the answer isn’t necessarily relocation to Europe. It could be a relocation going the other way to the States,” Maguire said,
While the EU law has yet to be approved, LCH is already facing pressure from Deutsche Boerse (DB1Gn.DE), which is offering a “Brexit proof” programme to make clearing euro rate swaps more attractive at its Eurex operation in Frankfurt.
Maguire said if euro clearing were to be forcibly moved to the EU, other countries might want clearing in their currency repatriated from London. LCH clears over 90 percent of dollar denominated rate swaps in London.
Maguire said the EU should take a product-by-product approach to determine if clearing needed to be relocated.
“One could consider debt markets and repo markets of the euro zone being cleared in London having a different systemic risk profile, especially at a time of crisis in the euro zone,” Maguire said.
“Going through the portfolio, you can see different solutions, different options around that... maybe London is not the optimal place,” Maguire added.
The European Central Bank has been a key driver for relocation of euro clearing, and Maguire said euro repos and government bonds were more relevant than rate swaps to the central bank as they form part of its monetary policy transmission channel.
Some clearing industry officials say LCH’s euro repo and euro government bond clearing in London could shift to its Paris unit to soften the ECB’s stance, in a bid to leave euro rate swaps clearing intact in the UK capital.
Reporting by Huw Jones; editing by Alexander Smith