Eurex says EU euro clearing plans don't go far enough

By Huw Jones

By Huw Jones


LONDON (Reuters) - European Union plans to supervise euro-denominated clearing in London after Brexit don't give the bloc's regulators enough power to intervene in a crisis, Germany's stock exchange said on Tuesday.


The plans published by Brussels in June propose giving the European Central Bank and the EU's securities watchdog a direct role in supervising clearing of euro-denominated transactions like derivatives in Britain.


The activity is dominated by LCH, a moneyspinner for the London Stock Exchange <LSE.L>, and contributes to making the UK a global financial center.


Clearing ensures a transaction is completed safely even in rocky markets and the EU plans are already seen by critics as a market grab.

But Matthias Graulich, chief strategy officer at Deutsche Boerse's Eurex Clearing in Frankfurt, said the plans don't go far enough as they give little room for EU regulators to take action to defend the euro when a currency "fire alarm" rings at a clearing house.

"If the fire is starting, the fire fighting is not with the EU regulators or ECB, but with the Bank of England," Graulich told a Financial News debate.

Daniel Maguire, chief operating officer for LCH, replied that a clearer is responsible for dealing with defaults under rules set out in law.

"We are the fire fighters. The last thing you need at that point is a multitude of regulators saying what we can and can't do," Maguire said.

The two clearing rivals also sparred over market size, the cost of moving euro clearing to the EU, and the role of central banks in a crisis.

Maguire said only a small portion of euro clearing involved an EU27 counterparty, meaning there is no justification in shifting big chunks of activity to the bloc.

But Graulich said volume will rise massively because counterparties in the euro zone will need to derivatives to insure against interest rates changing, and more market participants like pension funds will clear trades.

Maguire said trading costs would rise by billions of euros if clearing was fragmented, but Graulich accused him of "pulling out a number" that was not based on realistic assumptions or alternative ways of making the market efficient.

They also revealed fundamentally different attitudes to cooperating with central banks in market turbulence.

Euro zone policymakers accused LCH of exacerbating the 2010 euro zone debt crisis by requiring banks to post more margin or cash to back trades in shaky government bonds.

Eurex is ready to handle more euro clearing, and Graulich said clearers should not fuel a crisis by hiking margins, but think of the wider economy and financial stability.

"I think it requires a lot of alignment in such a situation with the central bank, with the regulator, in order to avoid taking steps which increase the fire and risk further destabilization of the environment," Graulich said.

But Maguire said there was a "tightrope to walk", as a clearing house must think of all stakeholders, including its members, who are "on the hook" for losses.

Clearing house members don't want such a level of interference by central banks in setting margins, Maguire said.

(Reporting by Huw Jones Editing by Jeremy Gaunt)

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