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Britain strikes another deal to protect a multi-trillion dollar City market from Brexit

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK
The governor of the Bank of England, Mark Carney, speaks at a news conference at the Bank of England in London. Photo: Hannah Mckay/AFP/Getty Images

Regulators in the UK and the US have struck a deal to protect the multi-trillion dollar derivatives trading market in the City of London post-Brexit.

The Bank of England, the UK’s Financial Conduct Authority (FCA), and the US Commodity Futures Trading Commission (CFTC) released a joint statement on Monday saying that they had struck a deal on “continuity of derivatives trading and clearing post-Brexit.”

Derivatives are products based on the price movements of underlying assets or instruments, such as stocks, bonds, or interest rates. Banks and investment institutions use them to manage risk by, for example, hedging against big changes in interest rates or moves in currencies.

The global derivatives market is estimated to be worth over $500tn and as much as 90% of the global market in euro-denominated derivatives flows through London clearing houses. The UK is also a major hub for US dollar derivatives too — the UK has a daily turnover of $2.4tn for dollar-based derivatives, around 37% of the market.

Derivative trades through London clearing houses take place under EU-US rules and the deal struck on Monday extends this “regulatory relief” to UK firms post-Brexit. US firms will also get equivalent rights to operate in the UK post-Brexit.

Governor of the Bank of England Mark Carney said in a statement: “Derivatives can seem far removed from the everyday concerns of households and businesses, but they are essential for everyone to save and invest with confidence.

“As host of the world’s largest and most sophisticated derivative markets, the US and UK have special responsibilities to keep their markets resilient, efficient, and open. The measures we are announcing today will do that.

“Market participants can be confident that the clearing and trading of derivatives between the UK and US will maintain the high standards of today when the UK leaves the EU.”

J. Christopher Giancarlo, chairman of the CFTC, described the deal as “a bridge over Brexit,” saying, “London is, and will remain, a global center for derivatives trading and clearing.”

Chancellor of the Exchequer Philip Hammond said: “The US and UK are fundamental to the smooth functioning of the world’s multi-trillion pound derivatives markets, with around 97% of the centrally cleared interest rate derivatives market located in London.

“The action we have taken today with our partners in the US will ensure that markets can continue to thrive without disruption, and is yet another example of the special relationship between our two countries.”

The deal also reaffirms information sharing and cooperation agreements between US and UK regulators.

Earlier this month, the EU agreed to a temporary deal allowing UK clearing houses to continue to process euro-denominated derivative trades post-Brexit.

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Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.

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