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Markets

Banks warn EU of disruption in derivatives markets in January

  • Britain has left the EU and transition arrangements giving continued full access end on Dec. 31.
  • The EU's securities watchdog has said EU banks and investors are legally "obliged" to use a platform inside the bloc to trade swaps.
Published December 11, 2020

LONDON: Financial markets will be disrupted in January unless the European Union allows the bloc's investors to use derivatives trading platforms in London, a group of seven financial industry bodies have said.

Britain has left the EU and transition arrangements giving continued full access end on Dec. 31.

Brussels has so far not granted "equivalence" or permission for platforms in London, the world's major centre for derivatives trading, to continue serving banks and companies in the bloc from Jan. 1.

The EU's securities watchdog has said EU banks and investors are legally "obliged" to use a platform inside the bloc to trade swaps, or a foreign platform that has EU equivalence already, such as in the United States.

The industry bodies told the EU's financial services chief Mairead McGuinness in a letter dated Dec. 9 that without access, EU financial services firms would end up having to use platforms in the United States, which already have EU permission.

"In the absence of action from policymakers, there will be disruption in the market as of 1 January, as not all clients across the industry will be ready to put in place alternative solutions on that date, despite best efforts," their letter said.

Market participants in the EU "at best" face reduce choice on where to trade, and avoidable extra costs and operational complexity, the letter said.

"Together, these factors may lead to lower returns for investors," it added.

The letter was signed by the International Swaps and Derivatives Association, Electronic Debt Markets Association, European Venues and Intermediaries' Association, AIMA, FIA, Association for Financial Markets in Europe, and the Securities Industry and Financial Markets Association.

The European Commission said all companies needed to prepare for Jan. 1 when EU law will cease to apply in Britain.

"They must prepare for all scenarios, including one in which no equivalence decision is taken by the European Union or the United Kingdom," the EU executive said, adding it would continue to monitor issues related to derivatives trading obligation.

McGuinness told the City of London this week to expect only limited access to the EU at best given Britain had decided to leave the single market.

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