German clearinghouse Eurex Monday said it is setting up a profit-sharing system with some of the world's biggest investment banks, in an unusual attempt to claw business away from the City of London ahead of Brexit.
Eurex Clearing will hand a portion of the profits from its interest-rates swap-clearing business back to banks in an effort to steal market share from its much larger U.K. competitor, LCH Group Ltd. J.P. Morgan Chase & Co., Citigroup and Morgan Stanley, are among the clients who have registered interest to participate in the program, Eurex said. The details of how the profits will be shared haven't yet been made public.
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The move comes as the battle to wrestle clearing from the U.K. after Brexit heats up. A clearinghouse sits between the buyers and sellers of instruments such as commodities and derivatives, pledging to complete the deal even if one side reneges. London houses much of this financial plumbing which manages trillions of dollars of derivatives contracts every day. Britain currently clears more euro-denominated interest-rate derivatives than other EU countries combined -- about three-quarters of the EU total.
European officials worry that a key piece of financial infrastructure could be outside the EU once the U.K. leaves the trading block. In June, the European Union's executive arm proposed plans that could force clearinghouses that do a large of chunk of business in euros to move into the EU. In a draft law, the European Commission also said that large clearinghouses operating outside the EU would be subject to tougher oversight including on-site inspections and access to financial accounts.
On Monday, the International Swaps and Derivatives Association warned that this policy presented "serious concerns." ISDA said forcing parts of the clearing business to migrate to Europe would fragment markets and create instability. Banks have warned that splitting off a piece of the clearing market to a new venue could increase the amount of capital they have to hold against those trades. This would make it more expensive for clients to hedge risk.
Despite this, several banks have shown interest in the initiative proposed by Eurex. The clearing business, which is owned by Deutsche Börse AG, is a relative minnow in interest-rate swap clearing. It views the profit-sharing system as a way to gain market share without relying on help from local regulators. The program opens for registration Monday. Those who register early will get "extra reward," Eurex says.
Write to Max Colchester at firstname.lastname@example.org
(END) Dow Jones Newswires
October 09, 2017 11:34 ET (15:34 GMT)