Fragmentation in derivatives market top concern post-Brexit for fifth of firms

A survey by FIA has found that 23% of firms see fragmentation of markets as the most concerning impact of Brexit on the derivatives market. 

More than 20% of market participants view fragmentation in the derivatives market as the biggest concern post-Brexit, a survey from the Futures Industry Association (FIA) has revealed.

FIA polled 274 respondents across exchanges, clearinghouses, banks, brokers, technology vendors, asset managers, and proprietary trading firms in the US, Europe, the Middle East, and Asia Pacific.

Of those surveyed, 23% said that market fragmentation is the most concerning impact of Brexit for the derivatives market, while regulatory conflicts and compliance costs was the top concern for 51% of respondents.

“Fragmentation of derivatives markets is a legitimate concern post-Brexit – particularly with London currently clearing around €900 billion per day. Relocating this business to mainland Europe removes euro-denominated derivatives from large netting sets in London,” Varghese Thomas, president, and chief operating officer at TradingScreen, told The TRADE.

“The problem is that this leads to smaller netting sets across separate clearing houses which, in turn, leads to higher costs and reduced capital efficiency as firms have to post more margin collateral. Firms that quickly identify how to reduce costs and increasing trading efficiencies will be best placed to manage the fragmentation.”

In terms of the most important issues for global derivatives markets, FIA’s report found that only 16% of respondents cited Brexit, trumped by the ongoing global pandemic which half of respondents said was the most important issue.

In February, the governor of the Bank of England, Andrew Bailey, warned that tensions between the UK and the EU would escalate quickly if the EU attempts to force all euro-derivatives clearing out of the UK.

The UK is currently three months into its temporary 18-month equivalence granted by the European Commission for its central clearing counterparties (CCPs) and at the end of this period a quarter of euro-derivatives clearing will move from the UK to the EU.

Bailey warned that at the end of this period the EU could “force or cajole banks and dealers to say there will be some other penalty unless you move this clearing activity into the EU” in order to obtain the remaining 75% of volumes.