Deutsche Bank AG and UniCredit SpA last month moved some of their swaps trades from London to Frankfurt, Germany, as banks used a lull in the ongoing Brexit drama to prepare for the worst.
About 10 banks took part in a switching run, in which lenders closed existing swaps positions in the UK and opened equivalent ones in Germany, people familiar with the matter said.
Some of the banks, including JPMorgan Chase & Co and Commerzbank AG, acted as market makers, treating the exercise as an opportunity to generate revenue by trading with the banks.
Continental European banks would be unable to keep their swaps — a widely used type of derivative — in London from April next year if the UK leaves the EU without a deal.
That could force the banks to move trillions of US dollars of derivatives from LCH Ltd, a unit of London Stock Exchange Group PLC (LSE), to Frankfurt’s Eurex Clearing, part of Deutsche Boerse AG.
As well as helping Deutsche Boerse at the expense of LSE, such a move would erode London’s dominance as Europe’s financial center — and potentially roil the market for interest-rate swaps.
Deutsche Bank and UniCredit declined to comment, as did spokespeople for JPMorgan and Commerzbank.
Bayerische Landesbank, which also shifted some swaps to Frankfurt, and the Bank of England, LCH’s primary regulator, also declined to comment.
LCH holds more than 100 billion euros (US$111 billion) of cash and bonds on behalf of banks and fund managers seeking to protect their swap trades against the possibility that a major trading firm will default.
The European Commission saved LCH from having to kick out its EU-based clients at the end of last year, when it extended the London-based clearing house’s right to provide services to continental firms until the end of March next year.
Banks can continue to buy and sell LCH-branded swaps even if the UK leaves the EU without a deal at the end of October — the current scheduled date for Brexit.
Unless the commission further extends LCH’s ability to serve EU banks, those firms would have to move their swaps positions somewhere else before April next year.
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