New York Wins From Brexit’s $3.3 Trillion Hit to One Key Market

A Wall Street street sign is displayed in front of the New York Stock Exchange in New York, U.S. (Photographer: Michael Nagle/Bloomberg)

New York Wins From Brexit’s $3.3 Trillion Hit to One Key Market

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The City of London lost 2.3 trillion pounds ($3.3 trillion) of its lucrative derivatives trading business in March alone, with Wall Street trading platforms gaining the most from Brexit.

U.S. swap-execution facilities took market share in trades in euros, pounds and dollars at London’s expense that month compared to last July, while venues in the European Union also gained, according to an estimate by Deloitte and IHS Markit Ltd.

In March, U.K. platforms hosted about 10% of euro-based swaps carried out on venues -- down from almost 40% in July, the month the researchers picked to illustrate pre-Brexit activity.

The multitrillion-dollar notional value of lost trades is the latest tally of the mounting costs for London’s financial industry since the U.K. left the EU at the start of the year. The EU blocked firms based inside its borders from using London derivatives platforms, pushing many into the U.S. where they can continue to trade.

Derivatives-trading giants such TP ICAP Group Plc and BGC Partners Inc. have spent millions of dollars to set up new divisions inside the EU or relied on their existing platforms in New York to accommodate the shifts in business. For EU banks that haven’t set up a U.K. subsidiary, the bloc’s decision to lock out London has kept them from trading opposite other banks and clients in what remains a significant slice of the swaps market.

London is still the largest capital markets hub in Europe, although Deloitte and IHS said in the report that the city’s financial firms could be forced to make even more adjustments if the EU decides to further restrict cross-border access.

“We are only at the beginning of the post-Brexit story,” David Strachan, head of Deloitte’s EMEA Center for Regulatory Strategy, said in a statement. “Brexit fragmentation has increased costs across banks’ European operations, at a time when the economic environment in Europe is already challenging.”

The report follows estimates that more than $1 trillion in assets have moved to Europe, with more expected to follow. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon recently said that the bank, which expects another $200 billion of its assets to move to the bloc this year, could ultimately shift all its bankers servicing EU clients out of London.

The costs of maintaining these new divisions in the EU is also starting to mount. According to the report, the process of splitting balance sheets between the bloc and London could produce a spike in capital costs of as much as 51% in extreme circumstances.

©2021 Bloomberg L.P.

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