EU unlikley to move euro-denominated contracts away after Brexit, says S&P

The EU is unlikely to seek to move euro-denominated clearing to the Eurozone, when Britain leaves the trading block, as it would increase stress on financial organisations, a ratings agency said on Thursday.

S&P Global Ratings, one of the big three rating agencies, said Brexit had renewed the possibility that the European Central Bank, would try to move euro-denominated contracts to the Eurozone or the EU.

Last year, the ECB attempted to reclaim activity to the single currency area in order to strengthen its ability to ensure financial stability.

The agency said that the ECB could either re-establish its ‘location policy’, which is likely to be “complex, slow and uncertain”, or it could seek to revise the European Market Infrastructure Regulation – a guideline that governs clearing standards in the EU, which could be simpler.

At this stage, neither of these options is likely due to “the massive extra burden of margin collateral” they might place on market participants.

S&P said that any attempts to repatriate EU clearing would likely result in additional costs and lower efficiencies for affected international clearing houses, and “could also vastly increase margin collateral requirements for their clearing members, at a time when collateral requirements are already rising and high quality collateral is becoming more scarce”.

However, it said that if one of the options did happen, it believes that global clearinghouses (CCPs) would have enough time and resources to adjust.

“That said, any move of a clearing service from the existing CCPs would require additional, but absorbable, one-off costs for the CCP operators and consume significant management time.”

According to the Bank of England, the City processes $1.2tn worth of deals in several currencies a day. Euro-denominated deals account over half of this.