Derivatives exchange considers post-Brexit move to Dublin

CME Group is examining options in Dublin to ensure its clearinghouse keeps access to European Union customers after the UK leaves the bloc, it is understood, as financial giants try to figure out how to protect links with the region.

Managers at the Chicago-based derivatives exchange are weighing stronger ties to Ireland to ensure its London clearing operations aren’t disrupted, but no decisions have been made, it is understood. CME’s options in Dublin could include seeking out regulatory licensing or opening offices. A spokesman for CME declined to comment.

UK voters’ decision to leave the EU is showing signs of undermining London’s role in financial markets, with New York and Frankfurt frequently named as potential beneficiaries. CME’s deliberations show Dublin is a contender, too. The decision on where to base a clearinghouse, which plays a vital role in derivatives by acting as a firewall from failed trading firms, is important because it could shift jobs and the balance of financial power from one city to another.

Clearing re-emerged as a battleground immediately after the Brexit vote, with French and German leaders arguing that euro operations shouldn’t remain in London once the UK leaves.

Regulations since the 2008 crisis boosted the importance of clearinghouses, requiring many derivatives transactions to pass through them.

Jockeying

CME started its London-based European clearinghouse in 2011. While its clearing presence is still very small, the internal talks show how executives that previously relied on their London address are jockeying to protect their businesses.

Unlike other mega exchanges such as Atlanta-based Intercontinental Exchange , which has a clearing presence in the Netherlands, CME depends on its London clearinghouse for European access.

Although they don’t run derivatives clearing, other UK companies in the exchange industry – such as currency venue LMAX Exchange and Bats Global Markets’s London unit – are considering Dublin as a way to keep Brexit from disrupting their businesses. Ireland has been part of the EU for decades and uses the common European currency.

UK clearing firms are able to serve EU customers for now because they’re part of the bloc, but they will have to secure authorisation known as equivalence after Britain leaves. It took about four years of painful negotiations for the US and Europe to come to an agreement on clearing equivalence.

The over-the-counter derivatives market is massive, and London is a global hub for those transactions. London Stock Exchange Group is the majority owner of LCH, which dominates clearing of interest-rate swaps, a market where some $2.7 trillion of derivatives change hands every day. LCH handles more than 90 per cent of cleared interest-rate swaps trades in major currencies. Its swap-clearing unit has more than 100 members.

CME has about 19 clearing members and its clearinghouse is designed to handle contracts tied to energy to foreign exchange and interest rates. Its Chicago operations cleared an average of about €7.2 billion of euro-derivatives each day this year, so far, without public objection from European officials. - (Bloomberg)