Brexit Woes Spur $376 Billion Manager to Shut London Swap Trades

(Bloomberg) -- The uncertainty surrounding Brexit has prompted Germany’s second-biggest asset manager to shift its interest-rate swap positions from the financial hub of London to Frankfurt.

Union Investment, which manages 333 billion euros ($376 billion) of assets, is the first to declare that it will close existing euro-denominated swap trades at London’s LCH Ltd. -- the world’s largest clearinghouse and probably among the City of London firms most vulnerable to disruption over the next few months.

“We have decided to transfer existing positions from London,” said Christoph Hock, head of multi-asset trading at Union in an emailed statement. It takes “into account the interests of our investors.”

Union uses Deutsche Bank AG to clear its swap trades at both LCH, majority owned by London Stock Exchange Group Plc, and Deutsche Boerse AG’s Eurex Clearing.

Clearinghouses ensure that derivatives trades are honored even if one of the traders defaults. Existing users of LCH must give the clearinghouse three months’ notice before closing their swaps trades.

Brexit has forced many finance firms based in continental Europe to reassess their continued use of LCH, because in a no-deal Brexit, they risk being unable to access the institution that is home to more than 90 percent of cleared swap trades.

The European Commission will probably adopt a plan next week that would classify the rules governing U.K. clearinghouses as being equivalent to those that apply in the European Union. That change should allow continental firms to keep accessing LCH even if Britain crashes out of the EU without an agreement in March.

Read more: how Brexit is already eroding London’s dominance of derivatives

A spokeswoman for Deutsche Boerse declined to comment, while a spokeswoman for LCH wasn’t immediately available to comment.

Because the Commission took so long to reassure firms that they will retain access to LCH, many of the biggest banks and fund managers had already planned for the worst. Union, for example, started setting up accounts at Eurex Clearing for its new interest-rate swaps trades in the summer.

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