Exclusive: Brexit bites into London’s FX trading as Singapore and New York seize City’s derivatives share
London’s status as the global hub for FX and derivatives trading is under threat for the first time since Brexit.
According to new findings shared exclusively with City PM today, a study by the Bank of International Settlements (BIS) found that while the UK remains the leading hub for currencies and interest rate derivatives trading, its share of both markets has fallen noticeably the last survey in 2019.
London accounted for over a third (38 per cent) of global turnover for FX trading in April 2022, a 5 per cent-point drop since 2019, when its share was 43 per cent.
In over-the-counter derivatives markets, its share slipped to 46 per cent, down from 51 per cent three years ago.
London’s share largely went to New York City and Singapore, as opposed to the EU.
‘Equivalence’ permit
The drop off comes as the City continues to operate without an “equivalence” permit with the EU on financial services – which would allow UK and EU investors easily trade across each other’s borders.
With no agreement since the UK formally left the EU single market and customs union, investors are waiting anxiously for the UK’s financial and markets bill to see what regulatory plans the government has for the City.
“These initial findings show that the reality of Brexit is starting to bite on market infrastructure,” according to Jerome Kemp, President of Baton Systems.
“Banks have set up EU entities, and these entities have been pushing risk back to their UK arms.”
Jerome Kemp
“This has significantly increased the complexity of the transaction lifecycle,” Kemp explained. “An additional legal entity in the chain means that operational processes need to be much faster and more transparent.”
The study also showed the average volume of foreign exchange trades grew to a record $7.5tn per day in 2022, 14 per cent higher than 2019.
While the interdealer market, where brokers such as TP ICAP and BGC Partners at as middlemen on trades between banks and other financial institutions, accounted for 40 per cent of the spot market and 54 per cent of derivatives markets.
Over the counter (OTC) FX swaps accounted for 51 per cent of global turnover, up from 49 per cent in 2019.
“You’d think that rising volumes and volatility would be a positive for FX trading desks,” added Daniel Carpenter, CEO of Meritsoft.
“The trouble is that as FX swaps business rises globally, investment banks inevitably pay more in brokerage fees. Dealing with multiple brokers, all with different rate card structures, is very challenging, to put it mildly,” he noted.
“On a typical GBP/USD swap, for instance, a head of desk must consider if it is a strategy or structured trade, whether it is being executed over the phone or electronically, all before figuring out the actual rate the broker will use to bill,” Carpenter concluded.