25 november 2020
European banks and investors are not allowed to work under UK rules when trading derivatives contracts in London. That other world financial center, New York, is laughing.
‘We understand that this situation is a challenge for the London offices of European banks. They may have to intervene to stay in line with European legislation, ‘says the Paris-based European regulator ESMA in explaining its decision.
ESMA decided – five weeks before the end of the Brexit transition period – that European banks and brokers that trade in derivatives in London are subject to European regulations. The British regulator had hoped that those banks could operate under British rules.
The City of London is a world center for derivatives. London plays a leading role in the interest rate swap market – worth $ 364,000 billion. In an interest rate swap, parties exchange interest payments, for example a fixed interest in exchange for a variable interest.
The decision of ESMA threatens to oblige banks to relocate derivatives trading to another country in the European Union. Goldman Sachs recently decided to install a new trading room in Paris. Other banks also have plans to relocate London staff to other EU countries before the end of the year.
There is also another option than moving to Europe. Banks can trade in countries that operate under derivatives rules approved by the European regulator. This includes Wall Street. It therefore looks like the US will have a larger market share in derivatives in the future.
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