By Brad Starr, Account Executive
It’s fair to say that one of the remaining major unresolved post-Brexit legislative areas that has been increasingly under the spotlight recently is the future for the Euro-denominated OTC derivatives market. It is a complex issue that has many layers to it and has been under the spotlight at AFME’s virtual European post trade conference as we heard from several senior executives of major players such as LSEG & Eurex.
With the euro clearing market sized at €83.5 trillion, you wouldn’t be mad to assume that the EC has taken a firm stance on the issue of what to do with the ‘temporary equivalence’ deal that currently stands between the UK & EU and is set to expire on the 31st June next year. The reality, however, is that senior officials are now hinting at a further extension – leaving the market completely unclear on the future for a major OTC derivatives market. With this in mind, there has never been a more important time for those with skin in the game to capitalise on the media attention to ensure they are in the conversation.
Currently, an overwhelming majority of the euro-denominated OTC derivatives market is cleared by LCH Limited, a subsidiary of LSEG in London. Since the drama of the Brexit referendum over five years ago, the EU has been on record saying that it intends on invoking a location policy for Euro-denominated clearing, preventing EU firms from clearing these contracts in the UK. However, when Brexit was ratified and Britain’s access to the EU financial market was largely severed on December 31st 2020, the future of this particular market was a major headache that the EU decided to put to the back of their mind.
With the deadline of 31st June 2022 on the horizon, financial institutions have increasingly argued that a forced relocation would harm liquidity and threaten financial stability. But it is not just those who hold positions in the Euro-denominated swaps market that should be interested in the future and the eventual decision (should it ever come) of the EC. Should the EC decide to press ahead with their plans to prevent EU access to UK clearing houses, it would create a very different landscape. As forced buyers and sellers, the migration would come at considerable cost to EU firms and would involve huge operational complexity – making this space a fertile hunting ground of new business for a whole range of market vendors.
The prospect of a further extension to the temporary equivalence deal that is currently in place has created an uneasy atmosphere and as the lights of the press shine increasingly on the contentious topic, it provides a significant opportunity for those firms in the thick of it all to contribute their views. Due to the large operational restructuring that such a major market shift would cause, market vendors have valuable contributions to make on the Brexit story that just doesn’t seem to be going away. And with this opportunity must come a sense of urgency – as the deadline approaches and industry conversations focus on this topic, it is important for those with valuable contributions to make to ensure that their voice is being heard.
Whilst the EC feels the pressure being applied by a host of financial institutions and mulls over an extension, it is clear that the issue will eventually come to a head as the EU seeks to resolve all Brexit related uncertainties as quickly as possible. With the turbulence that comes with this kind of uncertainty surrounding a major market changing event, now is the time to focus on messaging to take advantage of the spotlight.