The City of London lost £2.3 trn pounds of its lucrative derivatives trading business in March alone, with Wall Street trading platforms gaining the most from Brexit, according to a report from consultants Deloitte and data company IHS Markit.
U.S. swap-execution facilities pulled in more trades across euros, pounds and dollars in March while London experienced an exodus compared to last July, while venues in the European Union also gained.
Using the month of July to mark pre-Brexit activity, research shows that the percentage of euro-based swaps carried out on venues hosted by British platforms dropped from just under 40% in July 2020 to about 10% in March, while it rose on European platforms from 10% to 26%.
The figure in the US was a hike from less than 10% to 19% with New York being the main beneficiary.
The report attributes the shift in trading volumes to regulation, in the absence of a key EU and UK equivalence decision.
However, the data shows that some trading in OTC interest rate swaps moved from UK venues beyond what was strictly required by regulation, in particular for euro OTC IRS.
There was though little or no change so far in where OTC IRS are cleared, with the vast majority or 90% still going through UK central counterparty clearinghouses.
For now, there is no single EU capital emerging as a financial hub and countries are carving out their own areas of specialism. For example, Germany has become the main destination for new bank authorisations and banks’ bilateral trading on own account of equities, bonds and derivatives through systematic internalisers (SIs).
The Netherlands has become the go to place for MTFs for equities, bonds and derivatives while France is dominating the organised trading facilities (OTFs) space which are trading venues for non-equities, such as bonds and derivatives, are permitted.
“Whilst some capital markets activity has clearly migrated from the UK to the EU, there is no doubt that the UK remains the largest capital markets hub in Europe,” said David Strachan, head of Deloitte’s EMEA Centre for Regulatory Strategy at Deloitte.
He added, “But we are only at the beginning of the post-Brexit story. The changes banks have introduced to their business and operating models have been driven largely by regulation, rather than commercial considerations. Brexit fragmentation has increased costs across banks’ European operations, at a time when the economic environment in Europe is already challenging. And there are a number of upcoming regulatory developments which will set the course for European capital markets in the future, not least how the EU seeks to reduce its exposure to UK CCPs.”
He believed that “the challenge banks now face is how they can improve efficiency and achieve sustainable profitability across their European operations – and strike the right balance between what business they do in Europe relative to other global financial centres – whilst simultaneously preparing for new regulatory requirements coming down the track.”
Kirston Winters, Managing Director at IHS Markit’s MarkitSERV also noted, “These shifts in market share have created a more geographically fragmented market in EUR and GBP IRS and a more geographically concentrated market in USD IRS on SEFs, though the geographical fragmentation does not appear to have had a direct impact on liquidity.”
He said, “Trading liquidity in OTC IRS tends to concentrate on a currency-by-currency basis, as liquidity begets liquidity. However, the combination of a relatively hard Brexit for financial services, the lack of EU – UK equivalence, or a progressive, detailed financial services agreement, combined with the equivalence available from both the EU and the UK to use US SEFs, has had the effect of driving some former UK venue volume to SEFs and a number of EU venues.”
©Markets Media Europe 2021
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