LONDON (Reuters) - Moving euro-denominated clearing from London to the continent after Britain leaves the European Union would be a mammoth task and bump up costs for companies, a senior derivatives industry official said on Tuesday.
The prospect of Brexit has triggered calls from EU leaders like French President Francois Hollande for clearing of euro-denominated transactions like swaps to move from Britain to the euro zone.
“We are still exploring the consequences of the euro clearing issue which are multidimensional,” Eric Litvack, chairman of the International Swaps and Derivatives Association (ISDA), a trade body, told reporters.
“It’s very difficult to position ourselves on what is to a large degree a political debate.”
Average daily turnover in Britain of euro-denominated interest rate swaps totalled $928 billion (715.72 billion pounds) in April 2013, or 69 percent of the global market. ICE ICE.L in London is the leading exchange in trading of euro short-term interest rate derivatives.
Litvack said there are industry concerns about what would happen if banks were compelled to move a chunk of the clearing pool, making it more costly for users.
Users benefit from netting positions against each other inside the pool, thereby saving on cash used to back trades.
“Moving the swaps clearing business would be a significant risk. Moving part or large part of that would be a non-trivial exercise,” said Litvack, who is also head of regulatory strategy at French bank SocGen.
London is Europe’s top centre for trading and clearing swaps, a derivative contract banks and companies use to insure against damaging moves in currencies, interest rates or commodity prices.
Clearing houses manage credit risk in the event one party in a swap deal defaults.
Despite UK finance minister Philip Hammond casting doubt this month that euro clearing will move, bankers at the ISDA event see the shift of some euro clearing to the continent as inevitable, but differ over timelines.
Some say it could happen fairly quickly if the merger of London Stock Exchange and Deutsche Boerse goes ahead.
The bulk of interest rate swaps are cleared in LSE’s LCH.Clearnet, and they could be diverted to Deutsche Boerse’s Eurex Clearing, a senior banker said.
JUMBLE OF RULES
The derivatives sector runs on a jumble of EU rules which Litvack said that to work properly, they assume that London, the bloc’s dominant volume supplier, is part of the single market.
This is likely to end as Britain curbs the free movement of EU citizens, a step EU leaders say would bar it from having unfettered single market access in future, Litvack said.
“The likelihood that the current situation would survive an exit from the single market seems a pretty aggressive assumption.”
Alternatives include relying on “equivalence” or whereby the EU grants market access to a non-EU country that applies similar rules.
Litvack said “equivalence” was likely to be complicated and open to political interference.
These doubts, coupled with no expectation of continued full access to the single market, are prompting banks in Britain to work out how much of a presence they will need in the EU to continue serving customers.
“That is the real debate,” Litvack said.
Bankers at the ISDA conference said setting up a new base in the EU would take at least three to five years, and run into hundreds of millions of pounds in some cases.
After Britain starts formal divorce talks with Brussels, it has only two years before EU rules cease to apply, leaving banks under pressure to act sooner rather than later.
“Everything that needs to be done in two years takes more than two years,” Litvack said.
Editing by Susan Thomas
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