Billions in derivatives transactions are fled from London to New York after Brexit

The moon rises at dawn over Lower Manhattan and the One World Trade Center in New York City. Photo: Gary Hershorn / Getty Images

Trade worth hundreds of billions has shifted from London to New York due to Brexit.

Since the official entry into force of Brexit at the turn of the year, the European derivatives market has shifted significantly from Great Britain to the USA.

London has traditionally dominated the European market for interest rate swaps – derivative products that companies can use to protect themselves from unexpected changes in interest rates.

But New York has seen average weekly trading in these contracts of over $ 600 billion (£ 435 billion) since the turn of the year, data from Yahoo Finance UK shows. Individual figures show that London’s market share has fallen by 75%.

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The data comes just a day after numbers showed Amsterdam overtook London as Europe’s equity trading capital. The milestone underscores the impact of Brexit on the UK financial services sector, which accounts for a significant part of the UK economy.

Derivatives are contracts between two parties based on an underlying price or asset – usually an interest rate or an exchange rate. The market is huge – with a theoretical value of $ 600 billion – and London has traditionally been the hub of Europe. Failure to close a Brexit financial services deal has driven business to New York, the other global market center.

The International Swaps and Derivatives Association (ISDA) told Yahoo Finance UK that euro-denominated interest rate swaps traded in US venues averaged $ 882.2 billion per week in January. That was an increase of $ 246.2 billion in January 2020 – an increase of more than 250%. The value of the total market in New York fell 21% in January, data showed, which means that New York gained European business despite the market falling.

Bill Blain, a market strategist at Shard Capital, said the data suggested London banks “are no longer suggesting and supporting this deal for European clients,” and as a result, volumes in New York are rising by default.

The story goes on

Separate data released by IHS Markit last month showed that the US share of the European swap market had increased from 11% in December 2020 to 23% in January – more than doubling in just one month.

The Financial Times reported on Friday that London’s share of the euro-denominated swap market fell from 40% to just 10% last month.

A tranquil evening view of The Shard and the skyline lit up from Tower Pier in London, England. Photo: Jo Hale / Getty Images

Kirston Winters, managing director at IHS Markit, said in a blog post that the move from London to New York was due to “the combination of a hard Brexit, the lack of EU-UK equivalency and the available equivalency from the EU and the UK to order.” to use the USA [trading venues]. “

Britain signed a free trade agreement with the EU on Christmas Eve, but it did not cover financial services. European companies – or companies that do business in euros – currently cannot use London for most financial transactions. New York based companies now have the authority to negotiate with both UK and European customers.

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“We have gotten into an odd position from a European perspective where people do business in New York because it’s the UK and the EU, but the UK and the EU are not equals, especially in that regard.” Derivatives point, “said Andrew Pilgrim, who leads EY’s Government and Financial Services team.

High-ranking officials in the City of London had warned that the EU’s failure to provide access would ultimately drive business to New York.

“We are already seeing signs that New York will be one of the big winners,” Miles Celic, executive director of industry group TheCityUK, told a House of Lords committee last month. “There would be logic in the activity of moving to the US and we saw that.”

Catherine McGuinness, Chair of the City of London Corporation’s Policy Committee, told Yahoo Finance UK that the EU’s actions “could lead to business going to New York or Singapore”.

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Interest rate swaps are by far the most popular form of derivatives in the world. Companies enter into “swap” agreements with banks, which enable them to guarantee a fixed interest rate for a certain period of time. The product protects against changes in the interest rate and exchanges the real interest rates for a fixed interest rate agreed with the bank. Swaps are often part of borrowing and other trading transactions. They provide security that helps companies plan their future.

“Derivatives are one of the key components of modern finance,” said Blain. “They are extremely useful for protecting and making investments safer and for achieving investment goals.

“If we see a move away from Europe in the US market and critically in US trading hours, that tells me that less complex financial thinking is going on in Europe. I suspect there is still so much UK derivatives business going on, but it’s probably more a question of Europe, which is not getting the feed from the UK. “

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