Stock exchange chief warns on risk to London's euro business

By Huw Jones LONDON (Reuters) - The European Union is considering a limit on processing euro-denominated security transactions in the United States in a sign of what Britain might face after Brexit, London Stock Exchange Group chief executive Xavier Rolet said on Wednesday. Shortly after Britain voted in June to leave the EU, French President Francois Hollande said euro-denominated clearing of financial instruments such as derivatives must move to the euro area from London, which dominates the activity. Policymakers and bankers expect the European Central Bank to back this view. Clearing, which is becoming mandatory for swathes of the multi trillion market in derivatives, such as interest rate swaps used by companies to cover themselves against adverse moves in borrowing costs, ensures a trade is completed, even if one side goes bust. It is seen as vital plumbing for building up a financial centre. Rolet told a House of Lords committee that the loss of euro clearing - largely done at the LSE's LCH clearing unit - would fragment markets and force banks to tie up an extra 77 billion euros (£69.34 billion) in "margin" or cash to back trades, money that could otherwise aid economic growth. Political pressure on customers to shift clearing from London could drive the activity to the United States, Rolet said. "Which is why I understand that some discussions have already originated in the EU for limiting the ability of U.S.- based clearing houses to clear euro-denominated securities by capping or somehow restricting their ability to engage meaningfully in their business," Rolet said. LCH is a major clearing house for such transactions in the United States. Rolet said caps would not be consistent with the EU having already agreed that U.S. clearing houses were "equivalent", meaning they comply with rules that are as robust as those in the EU. Maintaining regulatory equivalence between the EU and Britain after Brexit would be crucial for clearing in London for EU customers to continue, Rolet added. He urged the government to send "general messaging" to clearing customers in London that moving out now could be the wrong decision and that the EU too would benefit from keeping market links with Britain. Junior finance minister Simon Kirby told the same committee last month that keeping euro clearing in London may not be a top priority for the government in Brexit talks. Rolet reiterated that shifting clearing from London could cost 100,000 jobs, a figure that would shortly be endorsed by new research, and what customers do depends on "declarations" in Britain on whether this business is valuable or not. Currently customers benefit from netting trades denominated in different currencies to save on how much regulatory capital they set aside in case of defaults, Rolet said. This "compression" of trades meant that risk worth $110 trillion was eliminated by LCH last year, saving $25 billion in regulatory capital, he said. If customers decided they cannot wait for the outcome of Britain's trade negotiations with the EU, then the "whole engine" of clearing across all major currencies in London would be at risk, Rolet added. Clearing contributes about a third of the LSE's business and the exchange is planning to merge with Deutsche Boerse in Frankfurt, which has its own clearing house. (Reporting by Huw Jones; Editing by Ruth Pitchford)