The German exchange Deutsche Börse is stepping up its efforts to replace London as the biggest euro derivatives clearing market after Brexit.
Euro clearing is the processing of euro-denominated derivatives contracts.
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A clearing house sits between two parties in a trade and manages the risk to the market if one side defaults on payment.
At present, the practice is largely undertaken by London-based firms led by clearing houses such as the London Stock Exchange’s (LSE) LCH.
London is the global leader for clearing all types of currency-denominated derivatives including the euro.
However, Deutsche Börse’s clearing house, Eurex Clearing, has said it will give investment banks that dominate the global swaps market financial incentives to use its services instead.
Eurex Clearing’s proposals, which include sharing revenue with its partners, have already gained initial support from major banks including Bank of America Merrill Lynch, Citigroup, Commerzbank, JPMorgan and Morgan Stanley.
The banks that are its user-members will also be included in the governance and committee structure of Eurex.
Companies that sign up to Eurex’s plans by November 20 will “benefit from an extra reward,” the clearing house said in a statement.
Charles Bristow, co-head of global rates trading at JPMorgan, said:
This initiative will bring greater choice and transparency to the market as well providing the opportunity for greater risk diversification and resiliency. We view these as important developments to benefit all market participants.
The LSE owns 57 percent of LCH, but only shares part of the profits it makes from interest rates swaps clearing with its user-members.
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LCH’s business is highly lucrative, and in London alone, volumes can exceed a notional $900bn a day.
Deutsche Börse’s announcement comes amid rising uncertainty over the future of the multi-trillion dollar global swaps business, which is predominantly carried out through LCH.
London will soon sit outside the EU, raising questions about the oversight of LCH after 2019.
The European Commission has asked for market feedback on plans for tougher oversight of overseas clearing houses. Will LCH need to comply with EU rules and accept European supervision?
The European Central Bank (ECB) recently said that is seeking to grant its governing council greater legal powers over euro clearing.
Eurex is the sole clearing house in the eurozone licensed to clear interest rate swaps and has a banking licence from the European Central Bank (ECB).
“This market-led initiative will benefit clients and the broader market place through greater choice and competition, improved price transparency as well as reduced concentration risk,” said Erik Müller, chief executive of Eurex Clearing.