By Huw Jones
LONDON (Reuters) - The Madrid stock exchange is stepping up efforts to rival Deutsche Boerse (ETR:DB1Gn) in attracting euro derivatives clearing from London, ahead of a European Union law to cut reliance on post-Brexit Britain's financial market.
The EU, particularly the European Central Bank, has long sought to end London Stock Exchange Group's (LON:LSEG) dominance in clearing euro interest rate swaps (IRS) - derivatives contracts that are widely used by companies to insure themselves against adverse moves in borrowing costs.
EU states and the European Parliament are approving a draft law requiring banks in the EU to maintain an "active account" with a clearer in the bloc to process a yet-to-be determined amount of their IRS business, meaning they would have to pull some activity from London.
EU permission for UK clearers such as LSEG's LCH unit to serve customers in the bloc also expires in June 2025.
Jose Manuel Ortiz-Repiso, head of clearing and repo operations at Switzerland's SIX Group, which owns the Madrid bourse, said he was not waiting for mandatory active accounts.
A "big sales effort" was now underway with hundreds of buy side, sell side and liquidity provider clients contacted, he told Reuters.
Madrid has long offered IRS clearing, but was little known and largely served local clients. It now seeks to leverage the international reach of its Swiss exchange owner.
"What we are considering is that of the total volume that LCH has, more or less between 25% to 30%, will be affected by these active accounts," Ortiz-Repiso said
The figure refers to the approximate portion of LCH business between EU counterparties, and therefore within reach of the draft EU law.
LSEG CEO David Schwimmer has said he was fairly confident there would be no sudden cut off in LCH clearing for EU customers in June 2025.
LIQUIDITY PROVIDERS
Some liquidity providers have made commitments to offer competitive spreads - the difference between buy and sell prices - to compete with LCH, Ortiz-Repiso said.
A "very efficient and competitive fee schedule" would also mitigate a loss in savings for banks by not being able to net positions across several currencies, as they do at LCH, he added.
The notional outstanding position in euro IRS at Madrid's BME Clear unit is 600 million euros ($634 million), while LCH cleared 3.6 trillion euros in euro IRS on Tuesday alone, when its notional outstanding was 135.7 trillion euros.
Deutsche Boerse's Eurex in Frankfurt has long been the main continental alternative to LCH, but has taken time to make progress despite offering sweeteners to banks.
Eurex cleared an average of 14 billion euros in euro IRS daily in September, with a notional outstanding of 13.7 trillion euros, up 9% on the same month in 2022, though still giving LCH a global IRS clearing market share of roughly 90%.
The European Central Bank said in a discussion paper over the summer that most banks already had an EU clearer account for euro IRS but with no or limited activity, and that "forced measures" were needed to make them active.
Mandating EU based clearing house members to "initially" clear 30% to 40% of their euro IRS in the bloc would not "directly interfere" with their international business which passes through London, the paper said.
Big banks in the EU warn they would be at a competitive disadvantage to international peers if they were cut off from the huge, multi-currency pools of liquidity at LCH in London.
($1 = 0.9450 euros)