LONDON (Reuters) – Splits in derivatives markets due to Brexit present big operational and revenue challenges for banks in the European Union and it will be customers not policymakers who decide where to clear swaps, a senior Deutsche Bank official said on Tuesday.
After Britain fully left the EU’s orbit on Dec. 31, swathes of euro swaps trading have left London for Amsterdam and New York due to curbs on EU banks trading on derivatives platforms in London.
“Derivatives markets are global and clients globally will go where they find what they are looking for, and that may not be the EU or the UK if we don’t get things right,” Johannes Pockrandt, co-head of government and regulatory advocacy at Deutsche Bank, told a Eurex derivatives event.
Euro swaps clearing is dominated by the London Stock Exchange’s LCH arm in London, and the EU has set up a committee to persuade banks to shift this activity to Eurex in Frankfurt by June 2022, when LCH’s temporary EU access ends.
Fiona van Echelpoel, deputy director general for market infrastructure at the European Central Bank, said the shift in swaps trading to the EU has been beneficial for the bloc.
But Pockrandt said that while there were indications this month that UK market share was recovering, the shifts in swaps trading out of the UK were not positive given they posed tremendous operational and revenue challenges to EU bank’s branches in London.
“What we have is a liquidity pool and market inaccessible by EU banks and their clients in the UK. The European Union DTO is un-levelling the playing field quite massively,” Pockrandt said, referring to the European Union’s trading obligation for derivatives (DTO) post-Brexit.
Pockrandt said it would be expecting too much for European banks alone to facilitate the shift in swaps clearing to Eurex in Frankfurt by June 2022.
“We can have political ambition and we can have great strategies in place, but let us not forget that ultimately this is about client need and client choice and that is made on very firm and hard evidence, and indicators,” Pockrandt said.
Van Echelpoel, who sits on the EU clearing committee, said there are no indications that the bloc will extend the June 2022 deadline.
(Reporting by Huw Jones; Editing by Susan Fenton)