Move of euro clearing to the EU would significantly reduce costs for the fund industry

Frankfurt – 23 November 2017. Interest rate swaps are an integral part of the risk management of funds. In view of the UK's impending Brexit, the German Investment Funds Association BVI considers it essential that the clearing business for euro-denominated interest rate swaps be moved within EU27. Not only is this required from a regulatory perspective, but also a shift, for example to Eurex Clearing, would on balance cost fund companies much less, with savings of up to 30 per cent being feasible.

This is the result arrived at by a study by Union Investment after analysing the effects of a shift of the euro clearing business to EU27 by way of portfolio analyses. According to this study, the cost benefits will result primarily from the offsetting effects of various asset classes and the more lucrative collateralisation options.

With this study, the first economic projections regarding a potential shift of EU clearing, as seen from the perspective of a major European asset manager, are now available. "For the fund industry, the advantages of having the euro clearing operations located within the EU are obvious: reduced costs, improved investor protection and greater financial stability", said Thomas Richter, CEO of BVI.

"If we succeed in bringing euro clearing to the international financial centre of Frankfurt, German fund investors will also benefit from the expected cost savings", added Jens Wilhelm, Union Investment's board member responsible for the financial markets segment.

Frankfurt is the very hub of the German fund industry, with almost 60 per cent of its assets under management in Frankfurt. A shift would be straightforward, as Eurex Clearing, to take one example, already meets all the legal and technical requirements for euro clearing operations. Moreover, this would mean that both clearing and collateralisation of OTC traded and exchange-listed derivatives would take place within the required EU framework.

Currently around 90 per cent of euro-denominated interest rate swaps are settled via the clearing house LCH in London. However, once Brexit has been finalized, it will no longer fall under EU supervision. Yet, effective supervision can only be ensured within the EU itself via direct access and control by the competent EU supervisory authorities.