New York Gains From the City of London's Pain

The latest scrap over London’s post-Brexit finance business has a clear winner. Britain and the European Union might have been hoping to fight over the juicy bone of derivatives trading, but a third dog is running off with the prize: New York.

New trading limits between the U.K. and the continent have prompted a large chunk of this lucrative work to move across the Atlantic. Clawing back the trillions of dollars of activity that’s leaving London, quite literally overnight, could be a long slog.

With counterparties from the EU now restricted from trading in Britain, and vice versa, dealers and investors predictably resorted to trading more interest-rate swaps in the U.S, a market that both the EU and the U.K. still recognize. But the degree to which the shift happened, without any obvious market glitches, has caught some participants by surprise.

In the first two weeks of January, U.S. derivative platforms — known as Swap Execution Facilities — saw their total market share jump to 83% from 75% for U.S. dollar interest-rate swaps (by far the biggest market for these types of trades), according to data compiled by IHS Markit. The shift in European trades was even more dramatic: In euro swaps, the SEFs gained 18 percentage points of market share to reach 39%; and even in sterling swaps, the U.S. share jumped to 45% from 27%.

Though the pendulum may swing back somewhat after a full month of trading — the first week in January was characteristically quiet — the loss to the City of London is unequivocal.

As for the EU, it is likely to have gained some of the business in euros, the market it cares most about, at the expense of London. But there will also be some trading that the London branches of European banks managed through the U.K. before Brexit that will have gone to New York and not Europe’s capitals. 

End users, too, are unlikely to be celebrating. With business now fragmented across the EU, U.K. and U.S., additional hedging and margin costs associated with dealing on different platforms will eat into their gains, even if liquidity is sufficient to keep spreads in check.

In theory, none of these changes in habit is set in stone. London and Brussels are still hammering out an agreement on financial regulations that could yet see the EU recognize U.K. bankers and financiers as “equivalent” to the bloc’s, potentially allowing business to return to pre-Brexit behavior just as quickly as it changed. But it’s relatively safe to say that whatever happens, Wall Street will be popping open the champagne.

The shift in dollar business from London to the U.S. will be hard to reverse, as will the euro trading, which the EU has repeatedly claimed it wants to bring back within its jurisdiction and, quite rightly, oversee. While much of this shift is largely about the plumbing of derivatives and share trading, involving relatively few jobs, business begets business in the financial markets.

The EU’s top financial services official said on Friday that this was reality hitting London. But one hopes the bloc has considered the longer term consequences for itself of Wall Street gaining more control over European markets. It could have avoided some of this by allowing equivalence for the U.K. finance industry from the get go. Financial stability hasn’t been imperiled by Brexit so far, but a deeper capital market on its doorstep is still in Europe’s best interest.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

©2021 Bloomberg L.P.

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