The Madrid stock exchange is increasing its efforts to compete with Deutsche Boerse in the quest to draw euro derivatives clearing from London. This initiative is in anticipation of a European Union law aimed at reducing dependence on the post-Brexit British financial market.
For years, the EU, particularly the European Central Bank, has aimed to diminish the dominance of the London Stock Exchange Group (LSEG) in clearing euro interest rate swaps (IRS), which are widely used by companies to hedge against unfavorable changes in borrowing costs.
EU countries and the European Parliament are in the process of approving legislation requiring EU banks to maintain an “active account” with a clearinghouse in the EU to handle a yet-to-be-determined volume of their IRS business. This move means they would need to relocate some activity from London.
The EU’s permission for UK clearinghouses, such as LSEG’s LCH unit, to serve clients in the EU will also expire in June 2025. Jose Manuel Ortiz-Repiso, Head of Clearing and Repo Operations at Switzerland’s SIX Group, which owns the Madrid Stock Exchange, stated that they are not waiting for mandatory active accounts. A “major sales effort” is now in progress, with hundreds of clients from the buy side, sell side, and liquidity providers being contacted.
Madrid has been offering IRS clearing services for a long time, but it was relatively unknown and primarily served local clients. They now aim to leverage the global reach of their Swiss exchange owner.
Ortiz-Repiso stated, “What we are considering is that of the total volume that LCH has, more or less between 25% to 30% will be affected by these active accounts.” This figure refers to the approximate portion of LCH’s business between EU counterparties and, therefore, within the scope of the proposed EU law.
LSEG CEO David Schwimmer has expressed his confidence that there will be no sudden termination of LCH clearing services for EU clients in June 2025. Liquidity providers have made commitments to offer competitive spreads to compete with LCH. Additionally, a “very efficient and competitive fee schedule” will help mitigate any loss in savings for banks who cannot net positions across multiple currencies as they do at LCH.
As of now, the notional outstanding position in euro IRS at Madrid’s BME Clear unit is 600 million euros ($634 million), while LCH cleared 3.6 trillion euros in euro IRS in a single day. In September, the notional outstanding at LCH reached 135.7 trillion euros. Although Deutsche Boerse’s Eurex in Frankfurt has been the primary continental alternative to LCH, it has taken time to gain traction, despite offering incentives to banks.
The European Central Bank has suggested that “forced measures” are required to encourage banks to activate their EU clearinghouse accounts for euro IRS. Big banks in the EU have cautioned that they would face a competitive disadvantage compared to international counterparts if they were cut off from the significant, multi-currency liquidity pools at LCH in London. ($1 = 0.9450 euros)