London, December 31
Britain’s markets watchdog intervened hours before the country leave’s the European Union’s single market on Thursday with a partial climbdown on curbs that risked disrupting swaps trades worth billions of euros.
The City of London’s unfettered access to the European Union, its biggest customer, ends when Brexit transition arrangements expire at 2300 GMT, and without the change of heart, the UK and the EU market participants would have been unable to trade swaps with each other when markets reopen on January 4.
Branches of the EU banks in London would have been particularly hit as the trade deal agreed by the EU and Britain last week does not cover financial market access.
Faced with the EU’s refusal to lift its own ban on trading swaps on platforms in London, Britain’s Financial Conduct Authority (FCA) said it would temporarily allow UK financial firms to use venues in the bloc if they do not have arrangements in place to execute the trade elsewhere, such as in the United States.
Industry officials say that some EU clients, such as smaller asset managers, would not be able to switch to a platform in New York.
“We will consider by March 31, 2021, whether market or regulatory developments warrant a review of our approach,” the FCA said in a statement.
Peter Bevan, global financial regulations head at Linklaters law firm, said: “This last-minute statement by the FCA…will enable UK firms to deal with clients subject to the EU rules without having to require them to sign up to swap execution facilities in the US.”
Sterling extended gains versus the euro after news of the three-month grace period.
It means that more swaps trading is likely 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 “equivalence”, for swaps trading but the bloc says it wants information from Britain about its intentions to diverge from EU rules before it can make a decision.
Chris Bates, a financial services lawyer at Clifford Chance, said there were limits to what the FCA would now allow, leaving swaps trading by hedge funds on their own account excluded.
“It’s clearly helpful for UK firms when trading with EU clients, but it has these limitations so it’s not the same as full equivalence,” 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 clash between the UK and the EU swaps rules, known as the derivatives trading obligation or DTO.
Britain took a more accommodative approach to euro-denominated share trading by allowing British banks to use the EU platforms from Monday, an acknowledgement that liquidity is set to leave London for the bloc.
The more restricted easing in derivatives on Thursday is a sign that Britain wants London to maintain its global dominance in swaps trading as far as it can.
Britain is hoping that the trade deal agreed last week will put Brussels in a better mood to grant equivalence in coming weeks to avoid the clash over derivatives trading re-emerging.
“We expect firms and other regulated persons to be able to demonstrate they are taking all reasonable steps during the first quarter of 2021 to ensure compliance with the UK DTO,” the FCA said. Reuters