Some of the City of London’s auld acquaintances staged a swift flit in the early days of the new year: €6bn of trading in euro-denominated shares such as Santander and Total switched to European venues.
The scale of the shift took many observers aback. Sure, December’s UK/EU trade deal had provided few guarantees of continuity in financial services. But London’s much-touted charms as a financial centre were supposed to grant it an immunity of sorts.
If the City cannot keep trading in EU shares, what of the far bigger — notionally speaking — market for derivatives? Forget billions and trillions, SwapClear — which dominates the market for OTC interest rate swaps — cleared trades with a total underlying value of $1.2 quadrillion in 2019.
The Bank of England has flagged possible disruption to $200bn worth of interest rate swaps as a result of requiring EU and UK banks to trade in their own jurisdictions or in the US. The London Stock Exchange, which boasts a majority stake in LCH, owner of SwapClear, calculates EU investors would have to cough up an additional $25bn a year to cover higher prices.
There would be a cost to the UK from lost business too. SwapClear last year reported revenues of €291m on a notional $1,230tn (€989tn) cleared, implying €1 in revenue for every €3.4m cleared. Apply LCH’s margins and tax rate to SwapClear and you get a corporate tax cheque of less than €30m. Even adding in employees’ income taxes barely doubles that.
EU institutions make up just 14 per cent of SwapClear’s revenues, only half of which is euro denominated.
But theorists are ignoring the lure of liquidity. This is the reason many non-EU investors opted to trade euro-denominated shares in the EU on Monday. Continental regulators now know they have a good chance of onshoring trading in whole classes of securities by insisting EU funds buy and sell them locally.
Swaps contracts, which would have to be closed out on one platform and reopened on another, are a lot stickier than equities. Even so, the City has little room for complacency.