11 May 2021

IHS Markit: Brexit, Global OTC IRS markets - Q1 review

Following our initial flash analysis in mid-January (available here) and our January review (available here) we have received a great deal of interest for an update of the activity in the global OTC interest rate derivative markets post Brexit throughout Q1 2021.

We have contributed to a joint report with Deloitte (available here) entitled "European capital markets: The regulatory considerations for banks as they move beyond Brexit" which contains highlights of the below analysis. However, for completeness we are providing the full analysis below.

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 when UK banks face EU clients who cannot access a SEF)
• 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.

Since our last analysis, the EU-UK Memorandum of Understanding (MoU) establishes a framework for voluntary regulatory cooperation in financial services. The MoU will launch a Joint UK-EU Financial Regulatory Forum, which will serve as a platform to facilitate dialogue on financial services issues. However, the impact of the MoU should not be overstated. Although an important step in ensuring an effective EU-UK relationship around financial services, it is simply an administrative agreement to have regular exchanges of information. However, in itself, it does not bring forward any changes in regulatory arrangements such as equivalence for the DTO. The CFTC also granted No action relief through letter number 21-09 dated April 7, 2021 which provide relief for U.S. swap dealers (SDs) from certain transaction-level requirements for certain swaps between their foreign branches and non-U.S. persons (by adding the UK to the existing relief, six become seven).

IHS Markit has assessed the Q1 2021 data processed by IHS Markit's MarkitWire platform to assess the impact of Brexit on single currency interest rate swaps (IRS)[i] 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 and non-DTO/MAT, cleared as well as total volumes and notional traded.

How did Q1 2021 compare to the prior 6 months?

EUR swaps

EUR: All Swaps

• The EU MTF/OTF share grew from less than 10% in July 2020 to a quarter in January 2021, February and March were consistent at 26%
• The UK MTF/OTF share fell from just under 40% in July 2020 to just over 11% in January 2021, 11% February and 10% in March
• The SEF share grew from less than 10% in July 2020 to 19% in January 2021, 17% in February and 19% in March.
• Off facility has remained fairly consistent.

IHS Markit