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Eric Müller: “We expect exponential growth”

22 Nov 2017

Eric Müller: “We expect exponential growth”By Andreas Kröner, Handelsblatt

Eurex Clearing CEO Eric Müller sees major opportunities for Deutsche Börse and the financial centre Frankfurt in settling derivatives transactions. Brexit means the status quo cannot continue.


Eric Müller has to position Deutsche Börse in the battle for the settlement of derivatives transactions after Brexit. He has developed a model for this that makes relocating clearing operations from London more palatable for financial institutions. This programme is well received. Around 20 market participants from the USA, the UK and continental Europe have decided to take part – including heavyweights such as HSBC, BBVA, Citi, JP Morgan, Morgan Stanley and Deutsche Bank.

Mr Müller, how much interest is there from banks and other investors in using the Deutsche Börse subsidiary Eurex Clearing to settle interest rate swaps in future?

We launched a partnership programme in October, where the ten most active players will profit from Eurex Clearing's economic success in the interest rate swap segment. Citi, JP Morgan, Morgan Stanley, Bank of America Merrill Lynch, Deutsche Bank and Commerzbank have been involved from the start. We've now also been able to attract major institutions from the UK, Switzerland and significant EU-27 states including Italy, Spain and the Netherlands. This means we have banks representing 80 to 90 percent of the global market volume for interest rate swaps on board.

And how is the situation in Germany?

We're now achieving very broad coverage in Germany. That's because in addition to Deutsche Bank and Commerzbank, we've also been able to involve the savings banks and cooperative banks and several regional state banks through Deka and DZ Bank. This means we have the entire “ecosystem” that is important for the interest rate swap market covered in Germany.

But these institutions don't have any realistic chance of being amongst the ten most active banks that will also participate financially in Eurex Clearing's success, do they?

We're offering the market an opportunity to build up an alternative liquidity pool. This programme is open to everyone. And we don't yet know which institutions will make use of it or how early and how much they will do so. This means that even institutions that aren't part of the London swap clearing consortium very much have a chance.

How do you see the competition for settling derivatives transactions?

The settlement of interest rate swaps – which is the world's second largest derivatives market after the forex market – currently takes place almost entirely in a clearing house in London. There are also high concentrations in the business with credit derivatives and repos. That gives politicians and regulators in continental Europe a headache. It's clear that the status quo can't continue. We have a licence to settle interest rate swaps and repos, but not for credit derivatives. France doesn't have any services for settling interest rate swaps, but is very well positioned in credit derivatives and repos.

A lot of large banks would prefer the euro clearing business to stay in London because they currently get better prices there than in Frankfurt. What makes you confident that you'll nevertheless gain market share?

The partnership programme breaks fresh ground for Deutsche Börse Group by, in principle, making the customer a shareholder of the clearing house (CCP). Moreover, we're not starting from scratch here. The outstanding volume for the settlement of OTC derivatives is already around US$2 trillion. So we have a good starting position. And we expect exponential growth in the next few quarters. As a result of the partnership programme, liquidity will also rise at Eurex Clearing because more banks will quote prices. We're working on further cooperation on the platform side too. This eliminates the point of criticism that prices in London are better.

But doesn't it ultimately depend on politicians and regulators whether euro clearing will have to be relocated from London? A lot of banks are hoping that there will be a two-year transition period and that clearing will still be possible in London until at least 2021.

Not everything depends on political decisions. The regulatory uncertainty surrounding Brexit is not the only motivation for many major banks to look at the issue. It's also about risk diversification. They don't want to have all their eggs in one basket. The interest rate swap market is the only market in the world where it's like that – and that's unusual. Having an alternative is desirable for market participants for risk reasons alone. A lot of market participants are wondering what the market structure should look like in the medium term.

But the European Commission has still left the option open for euro clearing to stay in London if it can be supervised by EU authorities there.

I don't think that's an option. The EU and the USA's clearing requirements mean that more and more business runs via clearing houses. And in the end, it's not just a matter of overseeing this business, but also of being able to intervene in serious cases. That's the crux of the matter. That's why the ECB wanted to bring about relocation to the eurozone as early as 2011, i.e. long before Brexit. The ECB lost in court at that time. But there are several ways that such a relocation can now occur in the course of Brexit. If you listen to regulators and politicians in Germany and France, the message is clear: not everything needs to be located here, but most of the euro business has to.

When will the major banks decide where they are going to settle their transactions in future?

That won't be a spectacular one-off decision. In the end, it will partly depend on end customers. After all, banks primarily do business as intermediaries. I think it's realistic that a second liquidity pool will gradually be built up. We still have quite some time to go until March 2019, and if there's a transition period, even longer still.

There is a controversial discussion about how many jobs depend on euro clearing. The London Stock Exchange has talked about 100,000 jobs in the UK. Frankfurt Main Finance, which expects 10,000 additional jobs in Frankfurt as a result of Brexit, also attaches great importance to clearing. By contrast, Deutsche Bank CEO John Cryan recently said that for clearing it was more like 74 jobs than 74,000. Who's right?

The number of jobs will depend on what the future market structure will look like. I don't think a massive number of jobs will be relocated overnight. But if the expansion of a liquidity pool for interest rate swaps in Frankfurt is a success, there will be significantly more jobs here. In that case the estimate that, in time, there will be 10,000 additional jobs in Frankfurt due to Brexit appears conservative. But in contrast to the LSE, I wouldn't talk about 100,000 jobs either.

How is it looking at Deutsche Börse itself?

The number of jobs wouldn't need to increase much here because our systems are scalable. We currently operate our clearing house with around 500 employees. Our London competitor, LCH, which is currently much larger, employs slightly more than 1,000 staff.

Mr Müller, thank you very much for the interview.

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