Fresh blow for London as euro derivatives trading floods out

Trading in a key euro-denominated derivatives market flooded out of London last month to rival financial centres in New York, Amsterdam and Paris, in the latest evidence of the blow dealt by Brexit to the UK financial centre.

The trading of euro-denominated swaps in London dropped from nearly 40 per cent of the market last July to 10 per cent in January, according to a survey published by data provider IHS Markit on Thursday.

The shift in the trading of these derivatives — often used by investors to hedge against moves in interest rates and currencies — is another setback for London, which gave up its status as Europe’s top share trading hub to the Dutch capital after it fully left the EU last month.

EU venues accounted for nearly a quarter of the euro swaps market in January, compared to less than 10 per cent in July last year. Trading on US marketplaces more than doubled to 20 per cent, IHS Markit found.

The data showed the switch in swaps trading was owing largely to changing behaviour among interdealer brokers, which privately negotiate deals between banks. The derivatives are often traded on venues run by companies like TP ICAP and Tradition.

This rapid reshaping of the market has been driven by a stand-off between London and Brussels, with each wanting to assert their supervision of this market segment. Both sides say the most actively traded swap contracts should be traded on venues they accept as having an “equivalent” standard.

Without an agreement, London branches of EU banks have routed many of their deals through the US, whose standards are accepted by both sides.

“This is what has caused a shift to the US venues, most markedly in euro swaps where the EU banks are,” said Enrico Bruni, head of Europe at Tradeweb, a swaps trading venue. An accord between regulators would reduce fragmentation in the market, he added.

“However, as time continues and the market adapts to new post-Brexit environment, we feel equivalence will not be as much of a priority as it once was,” Bruni said, adding that fragmented trading “could become more of a reality in the future”.

Over-the-counter derivative markets “are global in nature and very agile”, said Kirston Winters, managing director of MarkitSERV, the derivatives trade processing arm of IHS Markit.

European regulators have also been keen to clamp down on the misuse of “reverse solicitation”, when EU-based institutional investors formally ask for advice and services from investment firms outside the bloc.

Data from IHS Markit also showed a less pronounced shift away from London in trading between banks and fund managers, on platforms run by companies like Tradeweb, Bloomberg and CME Group.