SSM’s Dombret Touts Frankfurt as Candidate for Euro Clearing

  • Brexit bouys case for Deutsche Boerse-LSE merger, Dombret says
  • Frankfurt competing with Paris for euro trading business

How Will European Banks Fare Post-Brexit?

Bundesbank board member Andreas Dombret signaled that Deutsche Boerse AG ’s takeover of London Stock Exchange Group Plc would hand Frankfurt a trump card in the tussle for a slice of London’s banking business.

Banking supervisors are likely to take a critical view of euro-denominated trading and clearing being carried out in London once the U.K. leaves the European Union, said Dombret, who is also a board member of the Single Supervisory Mechanism that oversees euro-area banks. Frankfurt “would be the more appropriate alternative,” he said at an event in Germany’s financial capital on Wednesday.

“Supervisory authorities would need to be a lot more tolerant if this business were allowed to be conducted not just outside the euro area but outside the EU altogether,” he said. “That’s a level of tolerance I can neither imagine nor support.”

Gaining scale in clearing by linking Deutsche Boerse’s Eurex derivatives exchange and LSE’s LCH.Clearnet is the bedrock of Chief Executive Officer Carsten Kengeter’s plan to combine with LSE. Clearinghouses act as the middlemen in trades, as a buyer to each seller and vice versa, making good on the transactions that fail if one party defaults.

Euro Trading

Frankfurt, as home to the European Central Bank and the SSM, is among cities tipped to benefit from a so-called Brexit as policy-makers question whether clearing euro-denominated trading can take place outside the EU once the U.K. leaves. London’s role in clearing trades in the $493 trillion derivatives market has returned as an issue since Britain voted June 23 to exit the 28-nation EU. EU courts had previously blocked an ECB effort to bring clearing under its regulatory control by shifting it to a euro-area country.

“Clearly, one possible outcome is that some aspects of those businesses will need to move,” Ronald Kent, a managing director at the British Bankers’ Association, said at the same event. “I’m sure there will be lengthy discussions in years to come.”

French officials have also staked a claim to part of London’s euro clearing activities with Economy Minister Emmanuel Macron saying in a July 3 interview that Paris has a “much deeper marketplace” than Frankfurt.

Frankfurt Challenger

“I have news for you here in Frankfurt, there is a challenger,” Kent said. “Paris will put its hand up and say ‘c’est nous, naturellement’.”

The U.K.’s decision to leave the EU bolsters the case for Deutsche Boerse’s takeover of LSE, Dombret said.

“Once the U.K. has left the EU, bridges between both economies will be more important than ever before,” he said. The new company “has the potential to become such a bridge.”

Deutsche Boerse’s takeover of LSE edged closer to shareholder approval on Wednesday, clearing another hurdle as the companies navigate the still-looming threat of government opposition.

The German exchange said 53 percent of shareholders have approved the deal so far, close to the 60 percent minimum required. LSE shareholders backed the combination in a near-unanimous vote last week.

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