Euro clearing should be relocated to continental Europe after Brexit, and Germany should fight for as much as it can get of that business, the new head of the country's biggest stock exchange said Feb. 21, warning that the future of Deutsche Börse's business model might depend on the outcome.
EU regulators have pushed for the repatriation into the bloc of the clearing of euro-denominated derivatives, a €1 trillion-a-day trading business now primarily routed through London. However, the European Parliament has plans to soften the relocation rules, amid finance industry fears that such a move could split markets and push up funding costs for European businesses.
London Stock Exchange Group Plc's LCH Group Holdings Ltd. controls around 90% of euro clearing transactions and has a French subsidiary, LCH SA, that would be in a pole position to take over clearing in continental Europe if trading has to be relocated. And, with Germany entangled in protracted negotiations about the shape of its next government, France under President Emmanuel Macron has been stealing a march in terms of boosting its profile as a would-be financial center, warned Deutsche Börse AG CEO Theodor Weimer.
"We have to avoid becoming a mere booking center while the tax agreements and business deals are made in other European cities," Weimer said at a news conference on the stock exchange's 2017 earnings. "I don't believe that it is good for [Germany] to withdraw its focus just to industrial value creation. Financial markets and capital streams are too important."
Weimer lamented Frankfurt's failure to win the race to host either the European Medicines Agency or the European Banking Authority, which are to move from London to Amsterdam and Paris, respectively, after Brexit. He said Berlin is not as active as Paris in the fight for its financial sector.
"It is incredibly hard to promote financial issues in Berlin. We have a structural disadvantage here, which I must acknowledge as such," said Weimer, the former head of UniCredit Bank AG who took the helm at Deutsche Börse in January. He added that the French banking system is less fragmented than Germany's, making it easier for the former to function as a lobby.
There are other business opportunities for Deutsche Börse that might arise as a result of the U.K.'s departure from the EU, but euro clearing is the biggest, Weimer said, adding that his company's future could be closely tied to how that business is eventually distributed.
"We are not totally sure whether at the end of the day — if there is, in fact, the political will to have everything in one location, even if it's Paris — whether our model would actually prevail in the long term," Weimer said.
"There will definitely be a second euro clearing center besides London, that is clear."
CFO Gregor Pottmeyer said Deutsche Börse is aiming to claim a quarter of the dealer-to-buyside euro clearing business by 2019 and that it expects to be able to do this regardless of the eventual outcome of Brexit negotiations. It currently controls roughly €40 billion of the €1 trillion a day in daily transactions, he noted, estimating the potential revenue gain of the targeted expansion at €70 million a year.
"In principle, it just makes sense not to put all your eggs in one basket," he said. "It make sense to not have all your exposures to one [clearing house], therefore it makes sense to offer a good alternative."
Deutsche Börse has already moved to win a bigger share of euro clearing with the launch of revenue-sharing in its Eurex Clearing division. The partnership program, which will mirror LCH's approach to winning new clients, promises its 10 most active participants a significant share of revenues made in Eurex's multicurrency interest rate swap business.
Bank of America, Citigroup, Commerzbank, Deutsche Bank, JPMorgan and Morgan Stanley have been among the first to declare interest in participating in the program. The number of participants has reached 25 to date, Weimer told journalists.
Deutsche Börse reported fourth-quarter 2017 preliminary consolidated net income of €213.6 million, up from €170.0 million in the year-ago period. Full-year net income rose to €874.3 million from €722.1 million in 2016, and the company raised its dividend 4% to €2.45 per share.
Shares in the company were up just over 1% as of mid-afternoon in Frankfurt. The benchmark DAX index was off 0.45% at the same time.