FOR all the talk of banks deserting London as Britain’s departure from the EU looms, relatively little attention has been paid to the derivatives market. Yet this is a crucial area of business for British-based banks. The City handles a big chunk of the market, including 39% of the market in interest-rate derivatives alone, where global daily turnover averages $3trn. The rest of the EU accounts for just 9%. Brexit seems sure to cause significant disruption. Mark Carney, the governor of the Bank of England, recently warned that the very “legal validity” of pre-existing derivatives contracts could be put into question.
Brexit-related discussion of derivatives has tended to focus on the role of clearing-houses, which ensure that a contract can be honoured even if one side goes bust. Since the financial crisis, most countries have made it mandatory to clear derivatives trades. LCH, a clearing-house in London, clears over 50% of interest-rate swaps across all currencies; London houses...Continue reading