LONDON (Reuters) – Britain’s market watchdog came hours before the country left the European Union’s single market on Thursday with a partial drop in borders that risked disrupting trading in swaps worth several billion euros.
The City of London’s unhindered access to the European Union, its biggest customer, ends when Brexit transitional agreements expire at 23:00 GMT, and without the change of mind, UK and EU market players would not have been able to trade swaps when the markets reopen Jan. 4.
Branches of EU banks in London have reportedly been hit particularly hard as the trade deal reached by the EU and Britain last week does not cover access to financial markets.
Faced with the EU’s refusal to lift its own ban on trading swaps on London venues, the UK Financial Conduct Authority (FCA) has said it will temporarily allow UK financial firms to use venues in the block if they do not have arrangements to execute the trade elsewhere, such as the United States.
Industry officials say some EU clients, such as smaller asset managers, might not be able to upgrade to a platform in New York.
“We will review by March 31, 2021 whether market or regulatory developments warrant a reconsideration of our approach,” the FCA said in a statement.
Peter Bevan, head of global financial regulation at law firm Linklaters, said: “This last minute FCA statement … will allow UK businesses to deal with clients subject to EU rules without having to require them to register to trade runtime facilities. in the USA”
ACCESS TO THE MARKET
The British pound extended its gains against the euro after the announcement of the three-month grace period.
This means that more and more swaps are expected to leave London for EU-based platforms such as Tradeweb from Monday.
Britain has urged Brussels to grant full two-way market access, known as ‘equivalency’, for swap trading, but bloc says it wants information from Britain on its intentions to deviate from EU rules before being able to make a decision.
Chris Bates, a financial services lawyer at Clifford Chance, said there were limits to what the FCA would now allow, excluding hedge fund swaps for their own account.
“It’s clearly useful for UK businesses when dealing with EU customers, but it has these limitations, so it’s not the same as full equivalency,” Bates said.
The move comes after the Bank of England warned that interest rate swaps worth around $ 200 billion could be disrupted due to the conflict between UK and UK swap rules ‘EU, known as the Derivatives Trading Obligation or DTO.
Britain has taken a more accommodating approach to euro-denominated stock trading by allowing UK banks to use EU platforms from Monday, acknowledging liquidity is expected to leave London for the bloc.
The tighter derivative easing on Thursday is a sign that Britain wants London to maintain its global dominance in swap trading as much as possible.
Britain is hoping that the trade deal struck last week will put Brussels in a better mood to grant equivalency in the coming weeks to prevent the shock to derivatives trade from re-emerging.
“We expect businesses and other regulators to be able to demonstrate that they are taking all reasonable steps during the first quarter of 2021 to ensure compliance with the UK DTO,” the FCA said.
(This story is renewed to remove the apostrophe in paragraph 1)
Reporting by Huw Jones; Editing by Simon Jessop, Rachel Armstrong and Alex Richardson