Icma Warns on Euro Clearing Relocation

The International Capital Market Association (Icma) included access to market infrastructure as one of several risks attached to the UK’s departure from the European Union (EU), in its quarterly report released on July 12.

“Mandatory relocation would involve costs and risks for users of capital markets,” said Icma in its report, going on to state that “relocation will cause market disruption, particularly if relocation is not properly organised over a sufficient period of time.”

The European Commission has put forward proposals stating that, due to the UK’s exit, European authorities need enhanced oversight over critical market infrastructures such as central counterparty (CCP) clearinghouses.

In extreme circumstances, EC vice president Valdis Dombrovskis said in a press conference on June 13, the EU could require CCPs that handle significant clearing in euro-denominated instruments to be physically located within the EU.

The proposals have met with a dim response from the industry, which has warned that any relocation could increase initial margin costs by up to 30 percent. Icma further warned that a relocation policy could have a knock-on effect in areas such as repo trading, and not just in derivatives.

“CCP clearing is also important for European repo business, the majority of the volume of which is voluntarily CCP-cleared, and the European repo/collateral market will be impacted in case there is a significant increase in aggregate margining requirements as a result of changes to the CCP clearing of derivatives,” Icma said.

However, forced relocation is likely to be a difficult proposition, even in a best-case scenario. WatersTechnology reported on June 29 that some market observers do not believe the EC would, in fact, pull the trigger on forcing a CCP to move.

“It seems pretty clear to me and a whole bunch of other people that the concept of relocating clearing was a great thing to say, and a great thing to get lathered up about in a Brexit context, but is actually pretty meaningless because you can’t just pick something physically up and move it,” said Steve Grob, director of group strategy at technology vendor Fidessa. “It’s like saying ‘I’m going to pick up Silicon Valley and put it in Detroit.’ Easy words, but what does that actually mean?”