Deutsche shifts deals to Frankfurt
• Move is largely symbolic and no jobs will be lost but shift will help Deutsche Boerse and has the backing of ECB
Deutsche Bank has begun clearing a “large part” of new euro-denominated derivatives trades in Frankfurt instead of London, a spokesman confirmed on Monday as a key Brexit battleground in financial services heats up.
Deutsche Bank has begun clearing a “large part” of new eurodenominated derivatives trades in Frankfurt instead of London, a spokesman confirmed on Monday as a key Brexit battleground in financial services heats up.
The shift by the largest bank in Germany will help Deutsche Boerse’s efforts to attract a large part of the euro clearing market from London as Britain exits the EU.
Clearing ensures a transaction is completed, even if one side of the deal goes bust. The worry for the City of London is that if chunks of clearing move elsewhere, other activities like trading and jobs could follow, eating away at Britain’s biggest economic sector.
London Stock Exchange’s (LSE’s) LCH division has long dominated clearing of eurodenominated derivatives like interest rate swaps used by companies to cover themselves against unexpected moves in borrowing costs. The exchange had no immediate comment.
The move is largely symbolic and was widely expected given that Deutsche Bank’s home base is in Frankfurt, where the bank is also transferring some other activities due to Brexit.
The Deutsche Bank spokesman said no jobs were being transferred and the bank was effectively pushing a different button to route the clearing to Eurex, Deutsche Boerse’s clearing division.
International banks with European bases in London have been opening EU hubs to avoid Brexit disrupting their business.
The European Central Bank in Frankfurt told Reuters last week that being connected to local market infrastructure like clearing is a requirement for a eurozone licence.
The ECB declined to comment on Monday on Deutsche Bank’s shift in euro clearing.
A spokeswoman for Eurex said it now has a market share of 8% of euro clearing, up from virtually zero a year ago, still tiny compared with LCH.
The shift in Deutsche Bank’s clearing was first reported by the Financial Times.
Deutsche Boerse has set up a clearing business model similar to that of LCH by introducing a profit-sharing scheme last October to attract interest rate swap clearing.
There are now 29 firms in the scheme, with more to come.
“Our focus for the next six months will be to increase buyside activity based on the good price quality provided by the banks participating in our partnership programme,” Eurex said. The ECB has long wanted euro-denominated clearing relocated from London to the eurozone, arguing it should have some oversight, given that it would be called on to inject euros into the market if a clearing house got into trouble.
The EU is in the process of approving a draft law that will mean direct EU oversight of LCH in London after Brexit if it wants to continue clearing euro transactions for customers in the bloc, otherwise clearing would have to relocate to the eurozone.
Officials at the Bank of England, which regulates LCH, have argued that splitting euro clearing would fragment markets and bump up costs for users, a view disputed by Eurex.
But industry officials say a shift in some volume could even help LCH by making forced relocation less pressing.
Some LCH euro repo clearing has moved from London to LCH’s Paris subsidiary, but this may not be enough to satisfy the ECB.