UniCredit and Deutsche Bank Move their Swaps Trades London to Frankfurt

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UniCredit SpA and Deutsche Bank AG started to move swaps trades from London to Frankfurt last month. The banks used the Brexit drama lull to get ready for the possibility of the worst-case scenario.

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Around ten banks did a switching run. They closed their current swaps positions in the UK and then opened similar positions in Germany, so say those familiar with the happenings, who requested anonymity due to the nature of the private trades.   

Some of these ten banks, including Commerzbank AG and JPMorgan Chase Co., acted as the market makers, using it as a chance to trade with banks and generate revenue.

The banks of Continental Europe won’t be able to keep swaps in London (a type of derivative that is widely used) from April 2020 if the United Kingdom leaves the EU without a Brexit deal.  This could mean that the banks have to move derivatives in their trillions from LCH Ltd. (London Stock Exchange Group Plc unit) to Eurex Clearing in Frankfurt, part of the Deutsche Boerse AG.  

Given that the UK might leave the European Union by November, the banks will still have access to LCH until the end of the financial year, in March 2020, thanks to the European Commission’s permission to use the clearinghouse in London until then.

At LSE’s expense, the move would be helping Deutsche Boerse and would wear away the dominance that London has as the financial center of London.  It could also shake up the market in terms of interest-rate swaps.

UniCredit and Deutsche Bank have not commented on the matter, similarly to Commerzbank and JPMorgan.  Also shifting swaps to German, Bayerische Landesbank, LCH’s primary regulator of the Bank of England, would not comment either.

A subsidiary of BGC Partners Inc., Capitalab, managed the swapping exercise, intending to repeat it each month, said our sources.  The longer-dated swaps were moved instead of shorter-term contracts, the people said. No spokespeople commented from BCG, LCH, and Eurex.

LCH has over 100 billion Euros (equal to $112 bn.) in bonds and cash on banks and fund managers' behalves, looking to offer protection for the swap trades from a significant company default. The European Commission saved LCH from needing to get rid of clients based in the EU at the end of 2018 at the time it extended the clearinghouse's rights to offer their services to firms on the continent until the start of next April.

The banks can continue buying and selling LCH swaps even in the eventuality of a no-deal Brexit by October end, which is the current Brexit date scheduled.

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These firms will need to move swaps positions to other places unless the EC extends the LCH’s ability in servicing the EU banks.  

The switching service at Capitalab could massively increase derivative migration to Frankfurt because it could ensure that switches happen at the same time.  If a time lag were to happen, banks would be doubling their risk temporarily.

Due to this problem, Union Investment, the second-largest asset manager in German, was the only company to have already moved positions until Capitalab.  Their swap positions were closed at the end of 2018, and matching positions were created manually at Eurex Clearing, so says Christoph Hock, the leader of multi-asset trading in the company.

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