London faces new EU battle over lucrative derivatives market

The future of one of the City’s largest and most profitable markets – trading and clearing derivatives contracts – could be threatened next year unless the UK can agree a new deal with the EU.

In the first half of 2024, the London Clearing House (LCH), part of the London Stock Exchange Group, settled $799 billion (£630 billion) in transactions, up 15% from the previous year. same semester of the previous year.

The strength of the LCH has confounded Brexit critics, who expected wholesale trading in financial contracts centered in London to fracture and move to centers such as Frankfurt and Paris.

The unwillingness of German regulators and others to take on the risk of trading on less developed platforms meant the exodus never happened.

London’s right to trade derivatives contracts generated by EU-based financial institutions is based on a temporary exemption from Brussels and European financial regulators.

That agreement expires in June. If there were a pause in the “equivalence” talks, European banks could access derivatives clearing using the “active account requirement.” These largely backup accounts allow trading companies to use a European clearinghouse.

‘The market has been growing, as has the number of participants, clients and members. That business continues to do very well,” a source at the London Stock Exchange Group told the Daily Mail.

However, to secure the future of the LCH, Britain will need a more permanent “equivalence” agreement with the EU that allows banks and financial groups based in Europe to retain access to LCH trading.

The importance of derivatives trading to London is difficult to estimate. But it means banks around the world deploy trading teams to Square Mile to close deals and manage risk on their books.

Negotiations between London and the EU are ongoing, with the Bank of England, responsible for maintaining financial stability, leading the talks.

Officials hope the issue of equivalence, with European regulators considering UK regulation the same as that on the continent, can be resolved.

But some continental financial centers lament Britain’s dominance of derivatives. Another fear is that negotiations in this highly technical area could become caught up in wider efforts by Keir Starmer’s government to establish close economic ties with our former EU partners.