Risk: London likely to lose all euro repo clearing business

  • London’s euro repo market is on the move partly in anticipation of a forced relocation after Brexit. Netting benefits of T2S are also a “pull factor”, as LCH’s London entity cannot use the new pan-EU settlement platform.
  • The repo market will have moved out of London completely by March 2019, a former EU central banker said recently.
  • “If two to four banks decided to move to Paris, the others will follow the liquidity,” says the head of a trade association.
  • Euro-denominated repos could leave London particularly quickly, as they are mostly short-dated.

Twin pressures on the clearing of euro-denominated repurchase agreements in London are likely to push the business to the eurozone, and it may happen even before the UK leaves the European Union, the market’s participants predict.

They point the finger at the prospect of LCH’s London entity – which is the sole clearer of repos in the UK – being barred from clearing for EU firms after Brexit. Those fears are accelerating an existing shift in liquidity driven by a new pan-EU settlement platform, which allows trades to be netted irrespective of where in the bloc they are settled.

LCH has been clearing growing volumes of cash eurozone government bonds and related repos at its RepoClear unit in Paris since its creation in 2003. Meanwhile, activity at RepoClear in London – which comprises a wider range of bonds and repos in eurozone markets, as well as in gilts – has declined every year bar one since 2012. Within that, euro-denominated repos are seen as the biggest flight risk.

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