The US has snapped up market share in the derivatives market following the UK and the EU’s failure to reach a financial services agreement in the post-Brexit deal.
A report from data and analytics provider IHS Markit showed that in the first two weeks of January following Brexit, the US saw its saw global trading in dollar swaps on US venues rise from 36% to 48%.
Euro-denominated interest rate trading on US swap execution facilities in the first two weeks of January also rose from 11% market share to 23% market share while simultaneously European platforms’ share declined from 42% to 35%.
London has historically been the main hub in Europe for the trading of these instruments and the uptake in US market share has been a direct result of the lack of an equivalence deal between the UK and the EU.
The EU markets watchdog maintained its stance on the derivatives trading obligation (DTO) in November, subsequently blocking liquid derivatives from trading on UK venues post-transition period.
Hours before the Brexit deadline, the UK’s Financial Conduct Authority (FCA) imposed temporary amendments to the DTO through temporary transitional power in a bid to avoid disruption of the $50 trillion market.
Share trading took a more significant blow after various changes were made to the EU’s share trading obligation (STO), which eventually stated that only EU-listed stocks traded in pound sterling would be able to trade on UK venues, shrinking the UK’s market share in European share trading to just 2.5%.
“Time will tell whether a belated equivalence deal between the EU and UK will reverse this shift to swap execution facilities (SEFs) or even whether the ‘success’ of the [European Commission] strategy around the STO, which is likely to make the EC more determined to see through their similar strategy on DTO, leaves us with a EUR and GBP [interest rates swaps] market based in New York,” said Kirston Winters, managing director at MarkitSERV at IHS Markit.