London is facing a new EU battle for the lucrative derivatives market

The future of one of the city’s biggest and most profitable markets – the trading and clearing of derivatives contracts – could be in jeopardy next year unless Britain can strike a new deal with the EU.

In the first half of 2024, the London Clearing House (LCH), part of the London Stock Exchange Group, processed $799 trillion (£630 trillion) in transactions, a 15% increase from the same half the previous year.

The strength of the LCH has confounded critics of Brexit, who expected the wholesale trade in financial contracts focused on London to break up and move to centers such as Frankfurt and Paris.

The reluctance of German and other regulators to take on the risk of transactions on less developed platforms ensured that the exodus never happened.

London’s right to trade derivatives contracts generated by EU-based financial institutions rests on a temporary waiver by Brussels and European financial regulators.

That contract expires in June. If there were a break in talks on ‘equivalence’, European banks could gain access to derivatives clearing using ‘active account requirement’. These largely reserve accounts allow commercial companies to use a European clearinghouse.

‘The market has grown, as has the number of participants, customers and members. That business continues to do very well,” a source at the London Stock Exchange Group told the Ny Breaking.

Nevertheless, to secure the future of the LCH, Britain will need a more permanent equivalence agreement with the EU so that European-based banks and financial groups can maintain access to LCH trading.

The importance of derivatives trading for London is difficult to calculate. But it means banks from around the world are deploying trading teams in the Square Mile to make deals and manage the risks on their books.

Negotiations between London and the EU are ongoing, with the Bank of England, which is responsible for maintaining financial stability, at the forefront of the talks.

Officials hope the issue of equivalence – with European regulators considering UK regulations equivalent to those on the continent – can be resolved.

But some continental financial centers are lamenting Britain’s dominance in derivatives. Another fear is that negotiations in this highly technical area could become entangled with Keir Starmer’s government’s wider efforts to maintain close economic ties with our former EU partners.