Frankfurt boosts euro clearing incentives for banks, escalating battle with London
Deutsche Boerse is increasing the incentives for banks to shift clearing of euro-denominated derivatives from London to Frankfurt, escalating a battle between the financial hubs sparked by Brexit.
The exchange will strengthen Eurex Clearing’s incentive programme, designed to encourage banks to move swaps from The London Stock Exchange’s LCH unit to Frankfurt, and extend the measures to June next year.
Britain’s access to EU markets under temporary transition arrangements comes to an end on 31 December, with talks on a trade agreement ongoing.
Brussels has granted London clearing houses an additional 18 months to continue clearing derivatives for EU customers after the transition period ends, giving banks more time to shift billions of euros in positions from LCH and cut what it called their “excessive reliance” on the City’s clearing houses.
London completely dominates the European clearing business, with most trades in interest rate, commodity and credit derivatives coming through systems in the capital.
Clearing – the procedure by which financial deals are settled – is key to ensuring the correct payments reach the right parties, even if a counterparty goes bust.
“With the expansion of our central counterparty Switch Incentive Program, we want to make it easier for market participants to comply with the demands of the regulators and transfer swap business into the European Union,” said Matthias Graulich, a member of Eurex Clearing’s executive board.
“With our offering to clear [over the counter (OTC)] interest rate swaps within the EU, we are contributing to a more resilient and competitive clearing ecosystem,” he added.
Eurex said a complete waiver in booking fees on portfolio transfers would mean a member of the clearing house realising an “economic benefit” of up to €1.5m by moving a €250bn swaps portfolio from London to Frankfurt.
More than 500 banks and buy-side firms have been “on-boarded” for swaps clearing in Frankfurt, Eurex said.
The unit said its market share in euro denominated OTC interest rate derivatives in terms of outstanding volume “has been continuously growing”, and now stands at around 19 per cent.