London’s dominance of the €1tn-a-day (£890bn) euro clearing market is facing a new threat after the Frankfurt stock exchange announced a plan designed to lure the lucrative business from the City as a result of the Brexit vote.

Clearing is at the heart of the financial system and has become a key issue since the referendum as the majority of transactions denominated in euros are handled through London.

The activity is closely watched by financial regulators around the globe because it is intended to reduce risk in the financial system. Clearing houses act as intermediaries between the complex derivatives transactions which, for example, help protect companies against interest rate moves.

What is euro-denominated clearing? Euro-denominated clearing refers to the trade of financial products, such as derivatives priced in euros. Clearing houses act as buyer and seller in these trades. They agree to take on the risk of a default ​ - ​, on behalf of the actual buyers and sellers such as investment banks ​ - ​, in exchange for a payment. London clearing houses dominate the euro side of things, ​for instance ​dealing on a daily basis with €1tn ​worth ​of foreign-exchange contracts ( ​ie ​converting an amount of euros into another currency), compared with €400 ​m ​bn in New York.

Deutsche Börse is now setting up a scheme that would allow the big investment banks that channel trades through its clearing operations to share in the profits – a move regarded as a direct challenge to London.

Deutsche Börse described its move an an attempt to “to further accelerate the development of a liquid, EU based alternative for the clearing of interest rate swaps”. The finance minister for the German state of Hesse, Thomas Schäfer, said the plan would be beneficial for Frankfurt, which is one of the key cities among the remaining 27 EU nations vying for business that the City could lose as a result of Brexit.

For eurozone members, London’s dominance in euro-clearing is a long-running issue. In 2015, the UK government won a legal case against the European Central Bank, which had demanded that clearing houses should be based in the eurozone if they handed euro-dominated trades. In preparation for Brexit, Brussels has proposed ideas that could give the EU more responsibility for regulating foreign clearing houses.



Schäfer said Deutsche Börse’s clearing operation – known as Eurex – was “very clearly throwing its hat in the ring” as a contender for new business.



“Frankfurt as a financial centre will profit from this because clearing will become more attractive for German and international players,” Schäfer said.

But there have been warnings that risks to the financial system could increase if euro-clearing business migrates and fragments around other financial centres.



Jobs are also at risk, according to Xavier Rolet, the chief executive of the London Stock Exchange which owns 57% of the LCH. In the run-up to the EU referendum, Rolet said up to 100,000 jobs across the UK could be lost if London was stripped of its responsibility for clearing financial products denominated in euros.

Investment banks already share in the profits generated from their activities on the LCH as they own stakes in the business. Deutsche Börse said US investment banks Bank of America Merrill Lynch, Citigroup, JP Morgan and Morgan Stanley have already registered their early interest to participate in the new scheme along with German banks Commerzbank and Deutsche Bank.

In March, Margrethe Vestager, the EU competition regulator, blocked the £21bn merger between the LSE and Deutsche Börse.

Frankfurt is already attracting more Brexit-related job moves than other potential EU centre, according to data compiled by the City of London Corporation, the local authority which covers much of London’s financial district. It calculates that 9,750 roles have already been linked to the German city while last week Goldman Sachs admitted it had begun to make plans for Brexit by leasing space in a new Frankfurt tower block that could hold up to 1,000 staff.