New York gains from London’s pain

The latest scrap over London’s post-Brexit finance business has a clear winner. Britain and the European Union might have been hoping to fight over the juicy bone of derivatives trading, but a third dog is running off with the prize: New York.
New trading limits between the UK and the continent have prompted a large chunk of this lucrative work to move across the Atlantic. Clawing back the trillions of dollars of activity that’s leaving London, quite literally overnight, could be a long slog. With counterparties from the EU now restricted from trading in Britain, and vice versa, dealers and investors predictably resorted to trading more interest-rate swaps in the US a market that both the EU and the UK still recognise. But the degree to which the shift happened, without any obvious market glitches, has caught some participants by surprise.
In the first two weeks of January, US derivative platforms — known as Swap Execution Facilities — saw their total market share jump to 83% from 75%
for US dollar interest-rate swaps (by far the biggest market for these types of trades), according to data compiled by IHS Markit. The shift in European trades was even more dramatic: In euro swaps, the SEFs gained 18 percentage points of market share to reach 39%; and even in sterling swaps, the US share jumped to 45% from 27%.
Though the pendulum may swing back somewhat after a full month of trading — the first week in January was characteristically quiet — the loss to the City of London is unequivocal.
As for the EU, it is likely to have gained some of the business in euros, the market it cares most about, at the expense of London. But there will also be some trading that the London branches of European banks managed through the UK before Brexit that will have gone to New York and not Europe’s capitals.
End users, too, are unlikely to be celebrating. With business now fragmented across the EU, UK and US, additional hedging and margin costs associated with dealing on different platforms will eat into their gains, even if liquidity is
sufficient to keep spreads in check.
In theory, none of these changes in habit is set in stone. London and Brussels are still hammering out an agreement on financial
regulations that could yet see the EU recognise UK bankers and financiers as “equivalent” to the bloc’s, potentially allowing business to return to pre-Brexit behaviour just as quickly as it changed. But it’s relatively safe to say that whatever happens, Wall Street will be benefited.
The shift in dollar business from London to the US will be hard to reverse, as will the euro trading, which the EU has repeatedly claimed it wants to bring back within its jurisdiction and, quite rightly, oversee. While much of this shift is largely about the plumbing of derivatives and share trading, involving relatively few jobs, business begets business in the financial markets.
The EU’s top financial services official said that this was reality hitting London. But one hopes the bloc has considered the longer term consequences for itself of Wall Street gaining more control over European markets. It could have avoided some of this by allowing equivalence for the UK finance industry from the
get go. Financial stability hasn’t been imperiled by Brexit so far, but a deeper capital market on its doorstep is still in Europe’s best interest.

—Bloomberg