2021: Brexit, no equivalence for pan European OTC Interest Rate Swaps markets, what the data shows so far…

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Following our initial flash analysis in mid-January (available here) we have received a great deal of interest for a more detailed breakdown of the activity in the global OTC interest rate derivative markets post Brexit.

First, to recap why there was so much interest, the transitional period ended on 31 December with no relief for European Union (EU) firms on the derivatives trading obligation (DTO) from the European Commission (EC) and only limited adjustments from the United Kingdom (UK). Despite largely identical rules, no equivalence was granted between jurisdictions. This left many firms with conflicting and incompatible DTOs in the EU and the UK and no apparent option other than to trade the relevant derivatives on a US Swap Execution Facility (SEF), or in Singapore. US firms remained subject to the CFTC's Made Available to Trade (MAT) requirements.

Current position:

EU firms must meet the EU DTO by trading certain OTC Interest Rate Swaps (IRS) on an EU MTF/OTF or an 'equivalent' venue, currently limited to US SEFs and Singapore based venues,

UK firms must meet the UK DTO by trading certain IRS on an UK MTF/OTF or an 'equivalent' venue, currently limited to US SEFs and Singapore based venues (with some limited relief)

US firms must meet the MAT requirements by trading certain IRS on a US SEF or an exempt foreign swap trading venue, currently; UK MTFs/OTFs, EU MTFs/OTFs and Singapore based venues.

This means that EU, UK and US firms can access global on-venue liquidity but, UK firms cannot access EU venues (except in some special cases where temporary relief is available) and EU firms cannot access UK venues. This has created some specific challenges:

An EU firm can only trade certain IRS subject to both the EU and UK DTOs with a UK firm on a venue that allows both firms to comply with their local DTOs.

A UK branch of an EU firm is subject to both the UK and the EU DTO.

IHS Markit has assessed the January 2021 data processed by IHS Markit's MarkitWire platform to assess the impact of Brexit on single currency interest rate swaps (IRS) trading for the three currencies subject to the DTO in the EU and the UK and the MAT requirements in the US, analysing market share in EUR, GBP, and USD swaps: all, on venue, dealer-to-dealer, dealer-client, a proxy for DTO/MAT, cleared as well as total volumes and notional traded. In this analysis we distinguish between UK and EU venues.

 

How did January 2021 compare to the prior 6 months?

EUR swaps

EUR: All Swaps

  • The EU MTF/OTF share has grown from less than 10% in July 2020 to a quarter as of January 2021
  • The UK MTF/OTF share has fallen from just under 40% in July 2020 to just over 10% as of January 2021
  • The SEF share has grown from less than 10% in July 2020 to approximately 20% as of January 2021
  • Off facility has remained fairly consistent.

OTC graph 1

On-venue EUR swaps

  • The EU MTF/OTF share has grown from just over 10% in July 2020 to approximately 45% as of January 2021
  • The UK MTF/OTF share has fallen from just over 70% in July 2020 to approximately 20% as of January 2021
  • The SEF share has grown from approximately 15% in July 2020 to approximately 35% as of January 2021

OTC graph 2

EUR Dealer to Dealer Swaps

  • The EU MTF/OTF share has grown from approximately 5% in July 2020 to just over 30% as of January 2021
  • The UK MTF/OTF share has fallen from approximately 50% in July 2020 to approximately 15% as of January 2021
  • The SEF share has grown from approximately 5% in July 2020 to approximately 15% as of January 2021
  • Off facility has remained fairly consistent.

OTC graph 3

 

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