Deutsche Bank, Commerzbank Test Frankfurt Swaps Move

(Bloomberg) -- Deutsche Bank AG and 16 other lenders recently tested moving interest-rate swap positions from London to Frankfurt, according to people familiar with the matter, a signal that financial firms are pushing ahead with preparations for a no-deal Brexit.

The banks made dummy trades on Dec. 3 in the first known dry run of a service that could move trillions of dollars of derivatives from LCH Ltd. in London to Eurex Clearing in Frankfurt, the people said, asking not to be identified because the trial wasn’t made public. Capitalab, a subsidiary of interdealer broker BGC Partners Inc., oversaw the dry run.

If the U.K. leaves the European Union without an exit agreement and the banks have to use the service, the lenders’ existing positions at London’s LCH would be closed, with identical new positions opened at Eurex Clearing in Germany’s financial capital.

BGC and LCH declined to comment, as did Deutsche Bank and Commerzbank AG, which also took part. A Danske Bank A/S spokeswoman confirmed the lender participated in the test as part of its Brexit planning.

The European Commission recently drafted a plan that should allow lenders to keep using LCH to clear derivatives trades, but the details came so late that most firms had already developed a backup plan for their swaps deals. The Commission’s plan also only allows banks to keep using the London-based clearinghouse for 12 months.

The switching-service test was a precursor to launching a live service as early as January, one of the people with knowledge of the matter said. Eurex enlisted four firms including Capitalab to set up a working switching service back in the autumn.

Biggest Clearinghouse

LCH, which is majority-owned by London Stock Exchange Group Plc, handles more than 90 percent of cleared interest-rate swaps, making it by far the world’s biggest clearinghouse. Eurex, a subsidiary of Deutsche Boerse AG, is the only other EU institution that has approval to clear swaps.

Eurex is still working with other companies, including CME Group Inc. unit TriOptima and Quantile Technologies Ltd., to develop other swaps-shifting technology, according to a person with knowledge of the matter. “We support all these services as they add value to the market,” and we “take a neutral stand,” Eurex said.

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