London: Pan-European bourse Euronext said on Tuesday it would extend its contract with Britain’s LCH in a surprise move that could defuse tension over where clearing of euro-denominated transactions should take place after Brexit.
Euronext’s contract with LCH, a unit of the London Stock Exchange Group, was due to expire in 2018. Euronext had previously announced that it planned to use Intercontinental Exchange in the Netherlands for clearing, but those plans have now been scrapped.
Euronext and LCH said on Tuesday they have signed binding terms for a 10-year clearing deal they expect to complete in the fourth quarter of this year.
Euronext said the deal avoids customers facing added costs of switching from one clearing house to another at a time when they already face major challenges like new European Union securities rules, and adapting to Britain being outside the EU from 2019.
Under the deal, Euronext will swap its 2.3 per cent stake in LCH Group in London for an 11.1 per cent share in LCH’s Paris unit, giving Euronext a financial incentive to increase clearing volumes in France.
Euronext and LCH will “work together” to cut clearing fees by 5 per cent to 15 per cent from January 2019, Euronext said.
Clearing ensures that a stock, bond or derivatives transaction is completed safely and smoothly, even if one side of the deal goes bust.
An arcane part of financial plumbing, it has become highly politicised, with EU policymakers saying that clearing of euro denominated derivatives, which LCH’s London unit dominates, should move to the Eurozone after Brexit.
Euronext said the deal would allow clearing in a wider range of products, but did not say what those products would be. It could mean LCH effectively shifting enough of its euro clearing to Paris to satisfy Eurozone demands.
The deal could also make it harder for Deutsche Boerse owned rival Eurex in Frankfurt to pick up euro clearing business that shifts to the single currency area.
Euronext will have to pay ICE an undisclosed break-up fee.
