Derivatives Trading Fled Europe for New York After Brexit

The U.S. won the first round of attracting derivatives trading after Brexit disrupted European markets, according to IHS Markit.

Euro-denominated interest rate trading rose on U.S. swap execution facilities in the first two weeks of January to 23% market share, from 11% in December, the IHS data published Thursday showed. European platforms’ share declined to 35% from 42% in the same period.

Interest rate swaps denominated in U.K. pounds also moved to Wall Street, taking U.S. venues’ share to almost 23%, compared to about 11% in the month before the Brexit transition period ended.

A “hard-ish Brexit” and lack of financial services agreements between the two sides drove the shift, according to Kirston Winters, managing director at the company. Talks starting now between Britain and the EU will determine if the move becomes permanent, to the benefit of Wall Street, Winters said in a statement.

The financial industry and some regulators in Europe are pressing politicians in Brussels to grant an “equivalence” decision that would allow traders in the EU to use derivatives platforms in London. So far, the EU has rejected the pleas, arguing that there is no reason to extend access because financial stability isn’t at risk.

The IHS analysis is a sign that Brexit’s repercussions are still emerging for the interest rate derivatives market, which trades $6.5 trillion per day outside big exchanges, as well as the wider financial industry. Most trading in European shares in London has shifted to platforms in Amsterdam and Paris, while investment banks are in the process of moving hundreds of billions in assets and thousands of employees to new hubs in the bloc.

For now, derivatives brokers “have taken a pragmatic route as it was simpler to trade and report swaps in the U.S. where overseas rules were simplified last year, while regulators in the EU determine which rules should apply,” said Alex McDonald, head of the European Venues and Intermediaries Association, whose members include BGC Partners Inc. and TP ICAP Plc.

“The business has become agile and could still come back once there’s a more permanent arrangement and clarity in Europe,” said McDonald.

©2021 Bloomberg L.P.

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