[ M A R K E T R E V I E W | E U R O P E A N C L E A R I N G ]
largest ever average daily volumes in January.“ There is also a significant pipeline of new pension fund, asset management and hedge fund clients who are coming on board”, Graulich says.
The Eurex programme, under which derivatives clearing profits
“ There is also a significant pipeline of new pension fund, asset management and hedge fund clients who are coming on board.”
MATTHIAS GRAULICH, MEMBER OF EUREX CLEARING EXECUTIVE BOARD
are shared with the users, has definitely helped in achieving this target. The profit-sharing program has helped to make bid-offer spreads on Eurex fully competitive with those on LCH, Graulich argues. Brexit also helped, which he adds has“ stimulated a thought process about what to do in case of a hard Brexit.”
The Brexit process brought to the fore underlying issues which had been lurking in the background, such as risk diversification and the need for greater competitiveness, he says:“ Brexit required people to take action.” This process has now become independent of the specific final outcome of Brexit.
“ It’ s clearly good from an overall systemic risk perspective,” says Graulich.
Political brinkmanship over derivatives clearing is likely to continue, and even if politicians tacitly agree that the worst scenarios will be avoided, markets are unlikely to be willing to tolerate indefinite uncertainty.
Karel Lannoo, chief executive of the Centre for European Policy Studies in Europe, sees signs of financial behaviour already changing, with LCH moving business back to Paris.
For derivatives clearing, he expects“ more fragmentation overall, and hence more cost. For 20 years the UK has played the game of economy of scale, and they risk losing it.” While Lannoo has no doubt that London will remain the most important European financial centre, he expects that there will be a process of attrition through the prolonged uncertainty, and that in three years, derivatives clearing in London will be“ scaled down from today.”
“ There is a business logic to pooling products in the same currency,” argues Graulich. Eurex has sought to position itself as the incumbent for euro-denominated products, and, in the long term, Graulich expects this logic to triumph regardless of Brexit’ s final form.
“ People will see that these efficiencies are superior,” says Graulich, and expects Eurex will take a significant portion of post-Brexit derivatives clearing as a result. By the same logic, he says, dollar-denominated swaps may, in the future, be increasingly cleared in the US.
The EU knows that derivatives clearing is not going to move overnight, Lannoo says. Complex combinations of infrastructure and expertise that are hard to find in
“ Access to the UK market will become more expensive. There is a risk that clients will decide to invest elsewhere.”
MARC GIANNOCCARO, HEAD OF DEVELOPMENT, EXECUTION AND CLEARING, CACEIS INVESTOR SERVICES
the euro area would need to be assembled. Derivatives markets can only thrive in the presence of a range of accompanying markets, he notes. But much bigger movement of derivatives business is possible over a longer timeframe of 10 years, and the EU and US both could stand to become the beneficiaries of this.
46 // TheTrade // Spring 2019