LCH cancellation notices, Eurex incentives and prop trader rules

The week on Risk.net, September 29 – October 5, 2018

7 days montage 051018

EU clients face axe from UK CCPs

But Esma’s Maijoor offers lifeline, calling for continued access for EU members

Paypals: Eurex members await their pay day

Profit-sharing scheme has created more competitive swaps landscape

Moving the goalposts: EU fights over prop trader rules

French proposals could drive larger non-banks out of fixed income futures and options

 

COMMENTARY: Disorderly exit

The havoc caused by the UK’s decision to leave the European Union is being felt in earnest in the City of London.

LCH is expected to deliver cancellation notices to a third of its SwapClear members before year-end unless a deal can be agreed for EU firms to continue using its clearing services following Brexit. Risk.net reports this week that LCH members could be given only three months to transfer £38 trillion ($49 trillion) in swaps notional to alternative venues.

The reason for the move is that central counterparties in third countries can only offer services to EU members if a clearing house is recognised by the European Securities and Markets Authority (Esma) – but recognition can only be applied for after the UK’s departure from the EU. That could leave non-EU members footing the bill if a default happens, because in a no-deal Brexit scenario EU27 members would be unable to bid during an auction.

Esma has called for a transition period in which EU firms could keep using UK clearing houses, mirroring plans by UK authorities.

But with its bid to win market share on a voluntary basis, Germany’s Eurex Clearing stands to benefit from the chaos. It has introduced a profit-sharing programme to attract interest rate swaps business – and the scheme has achieved a core objective without yet paying out a single euro to participants.

Last month, Risk.net reported that even a last-minute Brexit deal would not stop City-based brokers and traders activating contingency plans that could see them permanently located outside the UK. In total, 21 venues said they plan to relocate businesses in France, the Netherlands and the Republic of Ireland.

The impact of the UK’s vote is also being felt across the Atlantic. It took three years for the Commodity Futures Trading Commission and EU to recognise each other’s rules on clearing houses, non-cleared margin and trading venues as equivalent. Now the US regulatory agency needs a similar comparability determination with the UK before March 29.

 

STAT OF THE WEEK

European banks would need to raise €14.6 billion ($16.8 billion) of Tier 1 capital to meet final Basel III rules, with the very largest lenders currently short the most, a study by the European Banking Authority shows.

 

QUOTE OF THE WEEK

“One of those remarkable instances of the establishment of a new infrastructure, where the work gets done in a basement but lays the foundations for decades, if not centuries, to come” – Jeremy Wilson, vice-chairman of corporate banking at Barclays, on the bank’s hackathon to design more efficient derivatives processing using Isda’s common domain model.

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