Banks in the European Union (EU) will have to use platforms inside the EU to trade derivatives from January, the bloc’s securities watchdog said on Wednesday, in a move that could cut off the City of London, the world’s biggest derivatives trading hub.
The European Securities and Markets Authority (ESMA), set out the EU’s so-called trading obligation for derivatives (DTO) once Britain fully leaves the EU on Dec. 31. The EU watchdog said the DTO from January would not change from the initial policy it set out last year, meaning EU investors would have to use a swaps platform inside the bloc, or based in a non-EU country that has already been granted “equivalence” or permission, such as the United States.
This will mean that branches of EU banks in London face conflicting EU and UK requirements on where to trade derivatives.
“ESMA acknowledges that this approach creates challenges for some EU counterparties, particularly UK branches of EU investment firms,” the watchdog said.
“However, ESMA considers that EU counterparties can meet their obligations under the DTO by trading on EU trading venues or eligible trading venues in third countries, and this situation is primarily a consequence of the way the UK has chosen to implement the DTO.”
The derivatives industry and UK government have urged Brussels to grant equivalence to avoid a clash over conflicting DTOs or introduce a “quick fix” legal workaround. So far, Brussels has not granted equivalence for derivatives trading.
“Based on the current legal framework, and in the absence of an equivalence decision by the European Commission, ESMA does not see room for providing different guidance,” ESMA said.