In conflicting divorces, playing hard on small details can be a way to show strength. The European Union refused to grant the United Kingdom the status of “equivalent” to commercial derivatives. Some operations have left London: this is a skirmish that anticipates larger battles.
The Amsterdam Stock Exchange traded at 9.2 billion per day in January, topping 8.6 billion in London, according to CBOE. Meanwhile, London’s share of EUR interest rate swaps fell to less than 10%, from 40% in July, according to IHS Markit. The activity not only moved to the European Union, but also to the United States, which Brussels considers an equivalent.
They are staggering numbers, but they represent a tiny percentage of the circulation of currencies, bonds, and other instruments flowing through the city. And while the transactions were not executed there, it was the people – or algorithms – who decided to stay mostly.
But the confrontation is evidence of the wider European Union’s desire to attract financial activity. Economic interests play an important role, but the authorities are also not happy that the bloc’s capital flows through a large financial center that is no longer subject to European regulations.
More battles to come. One of the sticking points is the clearinghouse for derivatives operations. The European Union has granted a temporary equivalent, but it expects mainland investors and companies to reduce their exposure to the UK over time. Meanwhile, some European regulators remain intent on tightening authorization rules, which allow pension funds to outsource decisions.
The EU’s conflicting approach has angered the Bank of England, which claims that the bloc is demanding a higher level of parity from the UK compared to other countries it deems acceptable. The European Union says it is waiting to see the trend of post-Brexit regulation. London insists it has nothing to gain from undermining European standards, but yet it has little to show in its principled position.
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