Derivatives trade worth billions flees London for New York post-Brexit

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

The European derivatives market has seen a significant shift away from the UK and towards the US since Brexit officially took effect at the turn of the year.

London has traditionally dominated the European market for interest rate swaps — derivative products that let companies guard against unexpected changes in interest rates.

But New York has seen its average weekly trade in these contracts balloon by over $600bn (£435bn) since the turn of the year, data provided to Yahoo Finance UK shows. Separate figures shows London's market share has fallen by 75%.

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The data comes just a day after figures showed Amsterdam had overtaken London as Europe's share trading capital. The milestone underlines the impact of Brexit on the UK's financial services sector, which accounts for a significant chunk of the UK economy.

Derivatives are contracts between two parties based on an underlying price or asset — usually an interest rate or foreign exchange rate. The market is huge — worth a theoretical $600tn — and London has traditionally been the hub in Europe. But a failure to strike a Brexit deal covering financial services has driven business to New York, the other global hub for the market.

The International Swaps and Derivatives Association (ISDA) told Yahoo Finance UK that trading in euro-denominated interest rate swaps on US venues averaged $882.2bn per week in January. That was up from $246.2bn in January 2020 — an increase of more than 250%. The value of the overall market in New York fell by 21% in January, data showed, meaning New York was winning European business even as the market declined.

Bill Blain, a market strategist at Shard Capital, said the data suggested London banks were no longer "proposing and propping these trade to European clients and, as a result, the volumes are going up by default in New York."

Separate data published by IHS Markit last month showed the US share of the European swaps market had risen from 11% in December 2020 to 23% in January — more than doubling in just a month.

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

Kirston Winters, a managing director at IHS Markit, said in a blog post that the shift from London to New York had been driven by "the combination of a hard-ish Brexit, the lack of EU-UK equivalence, combined with the equivalence available from both the EU and UK to use US [trading venues]."

Britain struck a free trade agreement with the EU on Christmas Eve but it did not cover financial services. European businesses — or those doing business in euros — are now unable to do most financial business through London. New York-based businesses, meanwhile, have the authority to deal with both UK and European clients.

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"We’ve ended up in a strange position, from a European perspective, where people are doing business in New York because its equivalent to the UK and its equivalent to the EU but the UK and the EU aren’t equivalent, particularly around that derivatives point," said Andrew Pilgrim, who leads EY's Government and Financial Services team.

Senior figures in the City of London had warned that the EU's failure to grant access would ultimately drive business to New York.

"We’re already seeing indications… that New York is going to be one of the big winners in this," Miles Celic, chief executive of industry group TheCityUK, told a House of Lords committee last month. "There would be a logic in activity moving to the US and we have been seeing that.”

Catherine McGuinness, chair of the policy committee at the City of London Corporation, told Yahoo Finance UK the EU's actions could "see the business go to New York or Singapore.”

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Interest rates swaps are by far the most popular form of derivative globally. Companies strike "swap" deals with banks that allow them to guarantee a fixed interest rate for a certain period. The product guards against any changes in rate — in effect "swapping" the real interest rates for a fixed one agreed with the bank. Swaps often form part of bond deals and other commercial transactions. They provide certainty that helps businesses plan for the future.

"Derivatives are one of the key components of modern finance," Blain said. "They are tremendous use in being able to hedge and being able to make investments safer and realise investment objectives.

"If what we’re seeing is a move away from Europe and into the US market, and critically in US trading time, that tells me that there’s less of that complex financial thinking going on in Europe. I suspect there is still as much UK derivatives business going on but it’s probably more a question of Europe not getting the feeds from the UK."

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