London Stock Exchange Group Plc’s clearinghouse in the U.K. capital has much to lose from a no-deal Brexit, but its Paris division has much to gain.
LSE’s French clearinghouse, LCH SA, is winning business from London as finance firms switch to clearing trades within the European Union to avoid being disrupted by Britain’s departure from the bloc next year. JPMorgan Chase & Co. and Societe Generale SA were approved to clear client trades through LCH this summer, and fund managers such as Frankfurt-based Union Investment and Helaba Invest have decided to send their trades to Paris.
“If at one stage there’s a regulatory decision that we have to make use of a central clearer that’s also continental European based, LCH SA gives us the biggest flexibility,” Christoph Hock, head of multi-asset trading at Union Investment, said in an interview.
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Hock said Deutsche Bank AG, Union’s clearing bank, will soon be ready to clear on LCH SA. Deutsche Bank didn’t immediately comment.
With Britain’s exit from the EU just six months away, financial-services companies, including Europe’s biggest banks, are activating plans that they hope will minimize the disruption from a no-deal Brexit. Top of their list is ensuring that they can continue to trade with clients on both sides of the North Sea.
LCH Ltd. in London, by far the world’s largest clearinghouse, stands to lose some swaps business as fund managers switch new trades to Deutsche Boerse AG’s Frankfurt-based Eurex Clearing . Continental Europe-based asset managers may find themselves cut off from LCH Ltd. on March 30 next year, but they will definitely still have access to Eurex.
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The French arm of LCH stands to benefit from the same trend. Continental European firms that trade CDS need a Brexit-proof alternative to Intercontinental Exchange Inc.’s London-based ICE Clear Europe, the dominant clearinghouse for European CDS. LCH SA in Paris will allow them to continue clearing their trades even if the worst happens in the Brexit talks.
“We already took the decision that going forward for CDS clearing, we have the opportunity to make use of ICE London and also LCH SA Paris,” Hock said. “That’s not only cost related, but for us, Brexit.”
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A spokeswoman for ICE declined to comment.
Frank Soussan, who runs CDS clearing at LCH SA, declined to say whether banks and fund managers are joining the Parisian clearinghouse as a hedge against a no-deal Brexit.
“We are happy whatever is the rationale for them to come to us,” Soussan said in an interview. “Once they see what we have, they will be seduced.”
LCH SA looks after as much as $4.5 billion in cash and bonds on behalf of its CDS customers, Soussan said. ICE Clear Europe held $8 billion of collateral at the end of March, according to its latest regulatory filings. Although that’s a big gap, it is tiny compared with the swaps market, where LCH Ltd.’s $201 billion of initial margin dwarfs Eurex.
“The biggest source of concern for European market participants is continued access to the cleared derivative marketplace,” JPMorgan’s global head of clearing, Nick Rustad, said in an interview. “It’s because there is no guarantee in the event of a hard Brexit that European legal entities can continue to meet their clearing obligations or remain clearing members of U.K.-based clearinghouses.”
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