Swaps Move From London to US and Europe
No financial services equivalence agreement post-Brexit has driven UK OTC Interest Rate Swaps (IRS) trading volumes to US and EU venues, according to MarkitSERV analysis.
Data from the OSTTRA-owned firm shows that after the dramatic moves in early 2021, there has been additional movement from the UK to the US venues in Q2, with UK MFTs and OFTs falling from 10% in March to 9% in April, and 8% in May and June 2021.
US SEFs increased from 19% in March to 22% in April and May, as well as 24% in June 2021. EU venues meanwhile have remained largely flat at around 26%.
When it comes to the sterling swaps market, after the significant moves back in January that saw SEFs overtake UK MTFs and OTFs to become the biggest on-venue market, Q2 has been stable. The only noticeable trend is a small decrease in EU venue market share from 5% in March and April to 4% in June 2021.
While this still remains much higher than the 1% in mid-2020, it is now half the 8% we saw in December 2020. SEFs have remained consistent with their March level throughout Q2 2021.
Interestingly, UK MTFs and OFTs saw a jump in June to 22%, the highest level in 2021 thus far, but this could be a one-month anomaly at this stage. As for dollar denominated swaps, the market has been remarkably consistent with UK MTFs and OTFs consistently around 6%, EU MTFs/OTFs at 3%, and SEFs between 46 to 48% each month throughout Q1 and Q2.
Commenting on the findings, Kirston Winters, Managing Director at MarkitSERV, IHS Markit (now part of OSTTRA), said: “OTC derivative markets are global in nature and very agile and with no sign of an equivalence agreement in sight, there has been an inevitable fragmentation of IRS trading volumes.
“Trading liquidity in OTC interest rate derivatives tends to concentrate on a currency-by-currency basis. However, the combined force of a harder than anticipated Brexit combined with the agreement from both the EU and UK to use US venues has had driven UK venue volume to SEFs and EU venues. There is also generally lower market activity compared to the start of last year,” he added.
The full research findings can be found here.
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