CFS Study shows: Costs of relocating euro OTC derivatives clearing to the EU would be considerably lower than the London Stock Exchange claims

30 November 2017

In light of the upcoming Brexit, the question arises as to how it will impact the clearing of euro-denominated OTC derivatives. Over 90 percent of this business is currently cleared via LCH Clearnet, a subsidiary of the London Stock Exchange (LSE). The current volume of outstanding euro-denominated contracts alone is over USD 80 trillion.

In light of the increasing importance of central counterparties (CCPs) in terms of international financial stability, a discussion is underway as to whether it should be mandatory to locate the clearing of euro OTC derivatives of EU-based firms within the European Union after Brexit.

Because if a clearing house were to run into financial distress, it is very likely that the ECB would be forced to provide the euro liquidity needed to stabilise the respective CCP. Direct supervision of systemically important CCPs by the ECB would therefore be essential to ensure European financial stability. Consequently, a substantial proportion of this business would have to be shifted from the London-based LCH to a CCP based in the EU.

Opponents of such a relocation invoke the enormous costs it would entail in various studies. According to a position paper from the London Stock Exchange, these costs could amount to USD 100bn.

The Center for Financial Studies (CFS) at Goethe University Frankfurt has analysed the existing studies and made its own calculation of the relocation costs. The CFS finds that the costs would come to approximately USD 0.6bn p.a., or approximately USD 3.2bn over a period of five years.

Professor Volker Brühl, author of the study, explains: “Due to the fragmentation of the market there may be a temporary increase in costs. However, the costs of up to USD 100bn cited by LSE are not verifiable and are far too high. Basing an estimate on more realistic assumptions, the maximum costs over a period of five years are likely to be around EUR 3.2bn. This is before even accounting for the potential savings that asset management companies could make as a result of the relocation.”

“In light of the great importance of CCPs for European financial stability, from my point of view a relocation to the EU is essential. The associated costs are only temporary and are negligible in size, especially in relation to the volume of the market in question, which is well into the trillions,” Professor Brühl continues.

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Download CFS study (pdf)

 

Contact: 
Sabine Kimmel
Center for Financial Studies
House of Finance
Goethe University Frankfurt
E-Mail: kimmel(@)ifk-cfs.de     
Tel.: (069) 798-30050
www.ifk-cfs.de