London will remain a big part of Europe’s financial market plumbing well beyond Brexit as the coronavirus pandemic has thwarted Frankfurt’s ambitions to grab billions of euros worth of derivatives clearing business from Britain. Deutsche Boerse’s Eurex Clearing, considered the strongest candidate to take business from the London Stock Exchange’s clearing division LCH, said its euro clearing had grown more slowly than expected due to delays in regulation changes, the COVID-19 pandemic and a broader reticence by banks to shift from London.
A new rule that requires market participants like asset managers to provide margin – a form of deposit – against swap trades for the first time will lead to greater use of Eurex by new customers, but the rule has been delayed by a year to September 2021 due to COVID-19. The LSE said there had been no discernible shift in clearing from London. Lawyers said banks will not move positions from London to Frankfurt voluntarily because of costs and complexity at a time when they are firefighting the pandemic.
Given the lack of movement, the EU is set to decide in the next few weeks on the length of time it will allow LCH’s clearing of euro swaps for EU customers to continue after Britain’s full access to the EU ends in December. There is a political cost for Britain to maintain EU access for its financial services industry – the Bank of England will have to allow EU securities watchdog ESMA to jointly supervise LCH. Some loss of London’s clearing business to the EU is seen as inevitable once the pandemic has passed.