In the wake of Brexit, the European Securities and Markets Authority (ESMA) has released its annual report on the EU derivatives market for 2023, shedding light on the impact of regulatory changes.
The report underscores the divergence in derivative market regulations between the UK and the EU, posing increased risks as the two jurisdictions follow separate paths. The findings reveal that the UK remains a central player in EU derivative markets, with 52% of notional held in contracts between the European Economic Area (EEA) and the UK. The report highlights a notable growth in exposures to other third countries, accounting for 22%, driven primarily by interest rate derivatives.
Regulatory developments, particularly those related to the EMIR clearing obligation and the MiFIR derivative trading obligation, have played a significant role in shaping cross-border derivative activity between the UK and the EU during the reporting period.
Jo Burnham, Risk and Margin SME at OpenGamma: “Assessing how to access the most cost-effective derivatives venue is front of mind for market participants right now. Brexit has also brought attention to the disparity in margin levels calculated by different CCPs. It has therefore unearthed the need to monitor – and regularly shift – where business is cleared.”
Kirston Winters, chief risk officer at OSTTRA, said: “There are few surprises in the report, at least as it relates to interest rate derivatives. However, as it measures outstanding notional rather than notional traded, the market share picture isn’t completely clear. With the ongoing EMIR 3.0 discussions it will be interesting to see how this develops over the next few years.”
Despite challenges, the EU derivatives market saw a 29% increase in outstanding notional amounts, reaching €314 trillion in Q4 2022. The shift in notional amounts towards interest rate derivatives (78%) and the continued dominance of credit institutions and investment firms in holding the most notional amount (over 80%) indicate the resilience of the market amid changing dynamics.
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