The Fight for Euro Clearing After Brexit Spills Out in Public

  • LSE and Deutsche Boerse take shots at each other in London
  • Role of ECB perturbs LSE senior manager: ‘fills me with fear’

The battle to control euro clearing once the U.K. leaves the European Union is getting uglier.

LCH, the London Stock Exchange Group Plc unit that dominates euro clearing, wants to stop the European Central Bank from gaining the power to veto its decisions. Eurex Clearing, the Deutsche Boerse AG-owned subsidiary that would probably benefit most if London was stripped of euro clearing, says that clearinghouses should involve the ECB.

When Britain voted to leave the EU a year ago, LCH quickly became the focus of European politicians seeking to win business from a post-Brexit London with LSE Chief Executive Xavier Rolet issuing dire warnings on how jobs, banks and financial markets would suffer if the status quo changes. Eurex is now hitting back against Rolet’s more outlandish claims.

At a briefing in London on Tuesday hosted by Financial News, senior managers from the two firms clashed in public for the first time to show how Brexit is driving a wedge between financial institutions that the market relies on to work together in times of crisis.

“The idea that any third party can interfere with the risk management processes of a clearinghouse fills me with fear,” said Daniel Maguire, chief operating officer of LCH. “We have to manage the risk as we see fit.”

Spanish Precedent

Matthias Graulich, a member of Eurex Clearing’s board, invoked LCH’s handling of the Spanish debt crisis in 2012 to show why clearinghouses should work more closely with the ECB. Days after Spain asked for a bailout in June 2012, LCH demanded more money from its members to hold as collateral against the country’s government bonds. The increased margin requirement was credited with pushing bond yields to a euro-era record.

“Let’s say Spain is in trouble and you raise the haircuts for Spanish bonds, you probably cause a lot of trouble to the market,” Graulich said. “You should take the action that’s in the best interest of the economy and stability. It requires alignment with the central bank to avoid creating fear. It’s necessary to align the institutions.”

For more on how Brexit endangers London’s clearinghouses, click here

Maguire countered that clearinghouses need a free hand to increase margin requirements even when there is no imminent prospect of a trader defaulting. Clearinghouses work by ensuring that traders get paid in even the most turbulent markets.

“I don’t want to name a country because it’s emotional,” Maguire said. “Aligning yourself 100 percent with your members versus aligning yourself 100 percent with the regulators is probably wrong, there should be a middle way. The members are the ones who have initial margin at stake. Our clients are on the hook.”

An executive from the European clearinghouse of Intercontinental Exchange Inc. argued that the ECB behaves differently from the Bank of England, LCH’s primary regulator.

“The approach of the English regulator is different from the ones one on the continent,” said Federico Becerra, a director at ICE Clear Europe. “In continental Europe, it’s treated more as a partnership.”

The European Commission recommended in June that clearinghouses based outside the EU but deemed systematic to European markets should face direct oversight from the club’s regulators. The commission left itself the option to strip euro clearing from London. The European Parliament and the EU’s member states will assess the proposals after the summer holiday.

— With assistance by Alexander Weber

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