Euronext’s management predicts that Brussels will force London’s prized euro clearing business to move into the EU after Brexit and has seen a growing number of UK-based banks start to prepare for that outcome.
The European Commission is due to rule next month on how to police euro-denominated securities transactions outside the EU. It is also studying how to regulate overseas clearing houses — which act as middlemen in trades and ensure a deal is completed in the event of a default — that affect financial stability in the EU.
Right now London dominates clearing of euro-related derivatives and has a large share of fixed income and repo markets. But the commission could require those transactions to be processed in the eurozone, which could benefit Paris-based Euronext.
Discussing the company’s first-quarter earnings, chief executive Stephane Boujnah said the company believed mandatory clearing in the eurozone was the likely outcome based on the current view of the European Central Bank.
“If the decision is taken to relocate, we will make sure this has the best impact on Euronext markets. This option is likely to prevail. The euro is their currency and 40-70 per cent is done in London. [Once the UK is outside the EU] it will become an anomaly and we should expect some movement,” he said.
Euronext, which does not own its own clearing house, has been overhauling its clearing operations in the last year, loosening its reliance on the London Stock Exchange-controlled LCH, in favour of Dutch entities.
Since late March, some banks have begun clearing more fixed income business in Paris, in part so that they can net trades against each other and reduce the millions of euros they must supply to the clearing houses that back their deals, according to three executives familiar with the market.
Yesterday Yves Mersch, a member of the ECB board, said the transition to a new European clearing and global clearing landscape would raise operational challenges and raise costs if poorly managed. “A clear timetable, good co-operation between regulators and careful preparation by market participants would be necessary for a smooth transition,” he said.
Lee Hodgkinson, head of markets at Euronext, said there were between 15 and 20 customers, mainly London-based investment banks, likely to be affected by any changes.
“They expect they will need to clear more business in the eurozone. We’re having some very interesting discussions. People are really talking about their plans,” he said.
Earnings for the group were slightly ahead of analysts’ expectations, although low market volatility hit trading in equities, derivatives and exchange traded funds.
Revenue in the three months to March 31 was up 0.1 per cent year on year to €126.6m. In the same period operating profit before exceptional items fell 2 per cent to €66.7m. It also introduced a floor to its dividend policy, promising to pay out a minimum of €1.42 per share to shareholders.
The worst wheat crop in more than 40 years hit French non-EU exports, it added. Shares in the group fell 0.6 per cent to €46.16 in Paris.