ADVERTISEMENT

UBS expects London to lose 25% of a €1 trillion-a-day business due to Brexit

The investment bank expects around €250 billion of daily euro clearing business will shift from London's LCH to Deutsche Borse's Eurex in Frankfurt. Deutsche Bank, Barclays, and HSBC have all moved some of their euro-denominated clearing business to the continent in recent months.

  • Deutsche Bank
ADVERTISEMENT

LONDON — UBS expects London to lose at least 25% of its euro clearing volumes as a result of Brexit and thinks the losses could be even greater in the event of a disruptive exit from the EU.

UBS said in a note on Thursday that it expects the London Stock Exchange's London Clearing House (LCH) to suffer a "25% loss of market share of the euro-denominated clearing market."

Clearing is where a company acts as a middleman, sitting between two parties in a financial contract such as an interest rate swap. Clearinghouses are meant to reduce the risk of a domino effect of defaults if one firm in a contract fails to pay up. Clearinghouses instead bare this risk and are well guarded against them.

ADVERTISEMENT

London dominates the market for clearing contracts priced in euros and LCH is by far the biggest venue. LCH regularly clears around €1 trillion-a-day in contracts, representing around three-quarters of the global market. Euro-denominated contracts make up roughly a quarter of LCH's daily volumes.

UBS analysts Michael Werner and Federico Braga said on Thursday that they expect LCH to lose volumes "no matter the outcome" of Brexit as "regulators like the EBA are encouraging institutions to prepare for a worst-case outcome to mitigate market disruptions upon Brexit.

"This is forcing institutions to increase connectivity with Eurex as a risk mitigation effort, significantly reducing its customer acquisition costs and challenges."

Eurex is a rival German clearinghouse owned by Deutsche Borse. Deutsche Bank shifted 50% of its euro clearing volumes from LCH to Eurex in July. HSBC and Barclays also shifted volumes to Eurex earlier in the year, according to the FT.

"Notional outstanding of OTC [over the counter] contracts cleared at DB1 [Deutsche Borse] was €8.4tn at the end of August, up from just €1.8tn at year-end 2017," UBS' analysts write.

ADVERTISEMENT

"We expect increased competition from DB1's Eurex to drive the migration of ~25% market share of the high margin dealer-to-client euro clearing business from LSE to DB1 by year-end 2020."

The Swiss bank cuts its earnings per share estimate for the London Stock Exchange in by 2-3% between 2019-21 as a result of this forecast drop off in volumes.

UBS added that this is their analysts' base case, which "assume[s] the EU and UK will sign a provisional exit agreement that will minimize disruption in the underlying markets."

In UBS' worst case scenario, the UK would suffer a "hard" Brexit in which it crashes out of the EU without any deal on future trading arrangements. If this were to happen, it "would prohibit the clearing at LCH of ANY derivative contracts (not just euro-denominated contracts) by EU-domiciled entities," the analysts write.

"In this scenario, we would expect much of the clearing business for US$ denominated contracts would move to the US, which has been granted equivalence by the EU under EMIR."

FOLLOW BUSINESS INSIDER AFRICA

Unblock notifications in browser settings.
ADVERTISEMENT

Recommended articles

Sony’s creators convention redefines the creative landscape for content creators

Sony’s creators convention redefines the creative landscape for content creators

Egypt, Nigeria, and South Africa ranked as Africa's most polluted countries in new report

Egypt, Nigeria, and South Africa ranked as Africa's most polluted countries in new report

10 African countries with the lowest life expectancy according to the World Bank

10 African countries with the lowest life expectancy according to the World Bank

Kenyan women are more obese than their men - here’s why

Kenyan women are more obese than their men - here’s why

Africa’s richest man Dangote stands between Europe and $17 billion in revenue

Africa’s richest man Dangote stands between Europe and $17 billion in revenue

After months of exchanging blows, Kenya and Uganda takes steps towards resolution

After months of exchanging blows, Kenya and Uganda takes steps towards resolution

Africa's first black billionaire could join $2.9 billion Vivendi bid for MultiChoice

Africa's first black billionaire could join $2.9 billion Vivendi bid for MultiChoice

10 most dangerous African countries in 2024

10 most dangerous African countries in 2024

Russia’s nuclear influence expands further north of Africa

Russia’s nuclear influence expands further north of Africa

ADVERTISEMENT