The impact of Brexit on the market

  • UK, being the financial hub of the EU, accounts up to 80% of the EU’s financial market activities.
  • UK handles 77% of EUR-denominated derivatives according to data from the Bank of International Settlements.
  • London and New York control 80% of the multi-trillion pound derivatives market, which is worth more than five times the global GDP
  • US companies contribute a third of the £GBP230trn of derivatives contracts traded annually in the UK which is the highest contribution by a region.
  • Upon the end of the transition period, there will be cliff-edge changes that may make an adverse impact on EU organisations and clients and their counterparties in the UK.
  • Brexit will impact on trade repositories and central securities depositories. Since after Brexit UK will become a third country, which require regulations of both UK and the EU to be fulfilled.
  • EU clearing members would cease to be clearing members if UK central counterparties (CCPs) are not recognised by the EU at the end of the transition, which would lead to operational challenges related to the migration of OTC derivatives contracts to alternative CCPs.
  • EU and UK CCPs and clearing houses would need to follow the regulations of both EU and UK regulators in order to have transaction crossways when UK is treated as a third country. The increasing obligations to meet both regulatory requirements would increase the complexity in derivatives trading.
  • As noted earlier, New York being the major player in the derivatives market could become the emerging leader post Brexit and the businesses from the UK could be moved over to New York due to its dominance in the derivatives market. The fact that about a third of the derivatives contracts traded in the UK comes from US companies would also help New York emerge as the winner of this clash.
  • UK being a highly liquid market, the EU will try to still maintain access to the market by providing some kind of a solution to its member countries. Towards this, it may allow EU traders follow the UK regulatory guidelines. However, for this to happen, UK regulations should be in line with the EU’s securities law.
  • In case a new trading regime provided to EU clients operating in UK, the trading systems would need quick implementation and continuous monitoring. A high level of expertise must be required to carry out such a transformation smoothly and effectively.

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Acuity Knowledge Partners

Acuity Knowledge Partners

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We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points. https://www.acuitykp.com/