The threat to London's dominant clearing industry intensified after 20 major banks threw their weight behind a new rival service on the continent.
The UK’s biggest bank, HSBC, and Spain’s BBVA joined the likes of US giants JP Morgan and Citigroup and Germany’s Deutsche Bank in a scheme launched by Deutsche Boerse, Germany's biggest exchange, to share more revenues with its banking customers.
Under the Eurex plans the 10 most active traders by volume on Eurex will gain a “significant part of the revenues” of its interest rate swaps, derivatives used to protect against interest rate movements. The banks will also have a bigger say in the governance of Eurex and its strategic direction.
The move is “an important step for European derivative markets”, said Christophe Rivoire, global head of rates at HSBC.
The plans by Eurex form part of a concerted effort to attract more euro clearing activity back to the Eurozone as the UK prepares to leave the EU. Eurex chief executive Erik Mueller said the move will “support the financial industry in times of enduring uncertainty”.
Clearing houses, which act as a middleman to protect companies from default risks during transactions, have found themselves at the centre of a fierce political battle as European regulators eye the business.
Euro-denominated clearing is currently dominated by LCH, owned by the London Stock Exchange Group, with €327 trillion of transactions cleared in 2015 alone by the firm. However, politicians in France and Germany have said they are concerned about the EU’s ability to preserve financial stability in a crisis.
Michel Barnier, the EU’s chief Brexit negotiator, yesterday emphasised the importance of financial stability in the Brexit talks. Speaking in Brussels, he said: “We will never compromise on financial stability, in the EU and in the Eurozone. Never.”
However, advocates of clearing staying in London argue a fragmented market could make the market less safe. In the autumn chancellor Philip Hammond said he will not “accept protectionist agendas, disguised as arguments about financial stability.”
Chris Arnold, a London-based partner at US law firm Mayer Brown, said the battle over clearing is part of a retreat from multinational cooperation on regulation. He said: “It does seem to be, in this area in particular, a retrenchment to one’s own jurisdiction.”
A fragmented market prevents customers from netting separate trades, meaning firms may have to post more capital as margin.
Catherine McGuinness, policy chairman of the City of London Corporation, said: “Clearing is an integral part of the financial services makeup here in London – it’s what we do best,” she said.
“It’s incredibly important that politics doesn’t overshadow the business argument for keeping clearing in the UK.”