Interest rate swaps are an integral part of the risk management of funds. In view of the impending Brexit, the German Investment Funds Association BVI therefore demands a shift of the clearing business for euro-denominated interest rate swaps to EU27. Not only is this required from a regulatory perspective, a shift, to Eurex Clearing for example, would on balance cost fund companies much less, with savings of up to 30 per cent being feasible.
This is the result that a study by Union Investment arrived at after analysing the effects of a shift of the euro clearing business to the 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, 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% of its assets being managed from Frankfurt. A shift would be straightforward, as Eurex Clearing, for example, already meets all legal and technical requirements for euro clearing operations. Moreover, this would mean that both clearing and collateralisation of OTC traded and exchange-listed derivatives take place within the required EU framework.
The fact is that around 90% of euro-denominated interest rate swaps are currently settled via the clearing house LCH in London. However, once the Brexit has been finalised, it would no longer be under EU supervision. Yet, effective supervision can only be ensured within the EU itself via the direct access of EU supervisory authorities.