Vast Euro-Derivatives Market, Centered in London, Is Set to Fragment as End of Brexit Transition & Uncertainties Loom

It shouldn’t “create risks to the stability of the financial system,” which is soothing to know.

By Nick Corbishley, for WOLF STREET:

About 43% of the $9.4 trillion in daily global derivatives trades tracked by the Bank for International Settlements are executed in the U.K. A large chunk of them are euro-denominated, but some of those trades will soon have to be executed elsewhere, according to the Paris-based European Securities and Markets Authority (ESMA), which announced on Wednesday that once the Brexit transition period expires, on Dec. 31, trading in euro-denominated derivatives must remain within the EU’s jurisdiction or in a country with “equivalent” standards to the bloc.

From that day, EU investors will have to use a swaps platform inside the bloc, or based in a non-EU country that — unlike the UK — has been granted “equivalence,” such as the US. As a result, branches of EU banks in London will have to grapple with conflicting EU and British trading obligations. British counterparties will have to use a UK authorized platform, while EU counterparties will have to use an EU authorized platform, making a trade between the two sides impossible.

“The decision is a starting gun for a fight between the UK and the EU for the location of international derivatives trading in Europe,” said Michael McKee, a financial services lawyer at DLA Piper law firm.

Toward a Fragmented Market

The result will be a much more fragmented European derivatives market. That is likely to be bad news for the UK’s all-important financial services industry, which accounts for more than one-tenth of the UK’s tax revenues and one-fifth of its service exports. It may also impact investors and companies, whose financing costs may rise as a result.

ESMA acknowledged that the situation “creates challenges for some EU counterparties, particularly UK branches of EU investment firms.” On the bright side, it shouldn’t “create risks to the stability of the financial system,” which is a relief.

At this late stage in negotiations, the only way this rupture of Europe’s derivatives markets can be halted is through a last-minute deal that grants so-called “regulatory equivalence” to the UK’s financial services industry. Or failing that, a last-minute extension to the transition phase.

During the 47 years that the U.K. was an EU member, banks based in Britain had a so-called “passport” that allowed them to operate across the 31 countries of the EU and the European Economic Area without being subject to local regulation in every place they sold securities. This meant, for example, that a U.S. bank’s London subsidiary could sell interest-rate swaps across Europe without having to satisfy the regulatory and licensing requirements of each jurisdiction.

This was great news for the City of London, which by the 1950s had reinvented itself by becoming a haven of the “eurodollar” business, where other countries squirreled away their dollar-denominated earnings, often to evade U.S. oversight. In the 1990s, it became a big player in the booming derivatives business. By the end of that decade, most derivative deals denominated in the newly created euro were taking place in London’s Square Mile, where the necessary financial infrastructure and know-how already existed.

End of An Era

The U.K. has 2,079 investment firms that use such “passports,” compared with 703 companies in the other 27 EU member states combined, according to the European Banking Authority.

The chief executive of the International Swaps and Derivatives Association (ISDA) Scott O’Malia warns that a lack of equivalence could exacerbate liquidity fragmentation in Europe’s derivative markets, precisely at a time when markets would likely be facing considerable uncertainty resulting from Brexit:

Without equivalence, an EU and UK firm would find it challenging to trade a derivative that is subject to both the EU and UK trading obligations, because the EU derivatives trading obligation (DTO) would require the transaction to be executed on an EU-recognized trading venue, and the UK DTO would require execution to take place on a UK-recognized venue…

A similar conflict would emerge when an EU entity trades derivatives through its UK branch with a UK counterparty, and vice versa. These conflicts would create an impossible situation for banks, asset managers, pension funds and corporates that trade with counterparties in the other jurisdiction.

On a positive note, the UK and the EU have both given a certain amount of ground in recognizing each other’s central counterparties (CCPs) or clearing houses. The UK recently granted equivalence for clearing houses established in the European Economic Area (EEA), just over a month after the European Commission had agreed to temporarily grant equivalence for UK clearing houses

Losing the Crown Jewel

Clearing is where a company acts as a middleman between financial trades, collecting collateral and standing between derivatives and swaps traders to prevent a default from spiraling out of control. In many ways, it is the City of London’s crown jewel. The City is home to the world’s largest clearing-house, LCH, which clears almost €1 trillion in euro-denominated derivatives a day. More than four times as much trading in euro-denominated derivatives is handled in the UK as in France and Germany combined.

That London dominates financial services in euros, even though the U.K. isn’t part of the common currency, has long been a source of resentment on the other side of the Channel. Now that the UK is no longer even part of the EU, the ECB and certain European governments, with France leading the way, want a sizeable piece of that action, for largely justifiable reasons.

But the actual task of uprooting a giant chunk of an industry that took decades to build and then relocating it across the Channel, across multiple jurisdictions, is horribly complex. It means rolling over millions of often exotic financial contracts, some worth billions of pounds or euros, into a completely different jurisdiction with an entirely different legal system.

And the stakes could not be higher. As the German financial regulatory authority, BaFin, warned in 2018, getting it wrong could result in derivatives contracts, valued notionally in the tens of trillions of pounds, being thrown into confusion.

For the sake of market stability, the UK and Brussels reached a compromise agreement that allows clearing houses or central counterparties (CCPs) in the UK to continue serving EU customers for 18 months from January 2021. But it is only intended as a temporary reprieve, to give EU market participants (in the words of EU financial services chief Valdis Dombrovskis) “the time they need to reduce their excessive exposures to UK-based CCPs, and EU CCPs the time to build up their clearing capability.”

Now, as the final month of the Brexit transition phase looms, the rush is on among UK-based banks and other FIRE-sector companies to set up bases in EU cities, even as Covid rages across the continent, to minimize their exposure to any post-Brexit disruption. The City of London is licking its wounds, having found itself in the unfamiliar position of having its needs largely ignored by the government of the day. William Russel, the 692nd Lord Mayor of London, complained just this week that the UK government had “missed the point” of the City of London throughout the Brexit negotiations.

As all of this goes down, the biggest beneficiary of a fragmented European financial services industry could end up being London’s biggest global rival, New York, as EU bank branches in London turn to platforms in the U.S. that can cater to EU clients. But even that is likely to be riddled with legal and technical issues. By Nick Corbishley, for WOLF STREET.

The “valuations” of office properties in London are crucial to REITs and property mutual funds. But now doubts are cropping up about them amid allegations of conflicts of interest. Read…  Doubts Surface about “Valuations” of London Office Properties amid Conflicts of Interest

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  88 comments for “Vast Euro-Derivatives Market, Centered in London, Is Set to Fragment as End of Brexit Transition & Uncertainties Loom

  1. WES says:

    Naturally the French want this to all happen in Paris, not Frankfurt!

    They will likely settle for New York!

    • Thomas Roberts says:

      The French would of course want that, but, early on, there was indications that the finance sector leaving England could be split across Dublin, paris, Frankfurt, and more. NYC could get a part of that as well.

      Some big looming questions are though, whether the euro survives and what effect that will have. With automation incoming (for finance jobs), there could be alot less jobs. I’m assuming that after the UK leaves, there will be new legislation covering all of EU finance and the EU will want it home.

      Where the top finance people want to live could have an effect as well, London and NYC aren’t what they used to be. The top guys could be mobile or get to pick and the newer smaller bulk of finance workers could be very spread out. There are a lot of possibilities right now and it’s anyone’s guess.

      • Joe Saba says:

        so sorry but WHY ARE DERIVATIVES even legal?

        hey I”m gonna bet on my neighbor driving his car and getting into accident
        can I have $5million on that please
        no I don’t have any interest/loan or other direct or indirect involvement in this asset

        at least call it gambling and make only those parties involved liable with set aside assets and no borrowing of anything

        • Nat says:

          There are reasonable uses of derivatives, they can be used to create customized insurance and lock in acceptable future prices in uncertain markets.

          That said, you are right, the vast majority of their use nowadays is gambling. Back in the day the solution was to tax derivatives as gambling (on top of any other relevant taxes) unless one of the parties involed with the derivative contract owned the associated assets and thus was either effectively insuring said assets or locking in their sales or purchasing price. But deregulation fixed that.

        • RSH says:

          Hey Joe, wanna be my counterparty to a bet of who flat-lines first:

          Monte dei Paschi vs. AIG

        • joe2 says:

          Ha Ha! Funny stuff. Say are you in the big club Carlin talked about?

        • Sgt Grumble says:

          If you have a deposit in a bank or really any counterparty involvement with any institution, sorry to tell you, you’re exposed to the derivative market.

    • John Bridger says:

      I must confess I find this terribly amusing. Politicians can hardly be expected to understand market mechanisms that even senior bankers and the various deal makers in this market don’t get. One of the major attributes people miss about a jurisdiction is the legal system. Institutions want the tried and tested English legal system to be the governing law if there is a dispute. No one wants Germany to be the jurisdiction/governing law and certainly not France. Complicating all of this is that many swap agreements, ISDAs etc are bespoke and if you want to change jurisdiction/governing law then they all have to be individually looked at and potentially renegotiated. That work hasn’t even begun. It is quite possible that the entire interbank market begins to freeze up post Brexit. You can’t just unplug the City folks. The lawyers and back office people at places like DB, MS and GS know this and are rightfully terrified. If this isn’t handled well you could see a mess that would rival a comet impact. Dec 31 Deutsche Bank is fine…Jan 2 its a zero.

      • Old School says:

        I owned a small cap stock once, I made money and should not have sold it. It had sales of about $400 million, kept about $80 million in cash, had ZERO debt, and paid out about 75% in earnings. That’s a stock that you can sleep at night with.

        Why do we need all of these high finance derivative products other than to facilitate abusing a fractional reserved banking system?

        • sunny129 says:

          OS

          ‘Why do we need all of these high finance derivative products other than to facilitate abusing a fractional reserved banking system?

          Good question.

          To reduce the ‘transparency’ for assessment of true value of collaterals using deivative in a leveraged fashion. Just study the Enron and Anderson scandals or AIG collapse during GFC. Regulators and the Wall ST are complicit.

        • Implicit says:

          The duo of the Fed and no Glass- Segal anymore makes the abuse forgivable, rewardable, and thus repeatable. To call it a moral hazard is being kind. The crime is crony thievery, but is not considered a crime, thus it is sure to continue.

      • joe2 says:

        Hmmm. So this was a sudden “no one could have seen it coming” event. And the poor babies did not have enough time to cover themselves? I begin to wonder about the intelligence behind these sorts of trades in the first place. If they are jurisdictional wink-winks they have gotten lazy.

  2. Dano says:

    If you don’t understand the EuroDollar market, go to MacroVoices Podcast & find the multi-part series with Jeff Snyder.

    It’s pretty crazy. Even after a few listens I still don’t understand it, and I’m not alone.

    • Cas127 says:

      Actually, the Eurodollar market itself (no derivative bells and whistles, etc) is worthy of a full post of its own, discussing its origin and primary reasons for being.

      Why?

      Because governmental currency manipulation (including via strictly domestic techniques) has played a massive role in the intl trade dislocations of the last 20 yrs (looking at you China).

      And the Eurodollar mkt was the first epic scale “offshore currency” set up to circumvent sovereign currency issuers from exercising complete dominion over their fiat (the USD and reserve rqmts in tbe case of the Eurodollar mkt…and, hopefully, someday, the offshore Yuan and China’s forced Yuan conversions…which have created massive trade imbalances).

      Americans are almost wholly ignorant of the existence and rationales for the Eurodollar mkt…so they have become ripe pickings for the Chinese gvt, whose understanding of macroeconomic levers in pursuit of intl trade advantages is unparalleled.

      A post about how/why the Eurodollar mkt operates would open a lot of American eyes as to how interntl finance and trade actually operate.

      • Thomas Roberts says:

        The CCP isn’t as clever, and China isn’t as developed, as people think. For a long time, US and European companies set up factories in China hoping that it would payoff. It backfired and now those companies are moving more and more factories out of China. The Xi faction is purgiing or has already purrged everyone who got China to where it is today.

        Everyone knows China makes up its gdp figures, actual estimates of Chinese gdp is at least 30 to 40% below what they claim and just like America there is a lot of fluff and nonsense of the remaining amount. Just like a certain Korea though, they can cause damage through potential hostille actions.

        Few people anywhere understand finance and remember everyone who got China to where it is (Chinese officials), is gone. The new Chinese officials are not very friendly and they only keep getting worse and less smart.

        • Cas127 says:

          “Everyone knows China makes up its gdp figures”

          Perhaps, but they aren’t/can’t make up the huge trade deficit figures the US has with them…unless the US gvt and Walmart are also lying.

          The huge transfer in productive capacity from the US (and other nations) to China from 1995 to very recently (abetted by very deliberate domestic macroeconomic policies by the CCP and extensive FX manipulation by same) has gutted US employment growth from 2000 on.

          By understanding how the Eurodollar mkt took complete control of the USD away from DC, we can find a template for how to circumvent Beijing’s complete (and abusive) control of the Yuan.

          Which would go a very long way to healing the ruinous intl trade policies of the US for the last 20-30 yrs.

        • Gandalf says:

          Yep, the recent busted IPO by Ant Group, over Jack Ma’s criticism of the governement is a good example of how the Xi regime is steadily going backwards on using the engines of capitalism and entrepeneurship to spur growth, and is just going for more and more strict centralized control and a old fashioned Central Communist economic planning.

          In the West, we just don’t get any inkling at all about the level of official repression of dissent, which I suspect is already at well above Hong Kong levels for the rest of China.

          If we can somehow coordinate with other democratic industrialized nations to stop China from stealing technology, I rather suspect China’s industrial power will just start shriveling in the future

        • sunny129 says:

          @Gandalf

          ‘IPO by Ant Group’ was/is threat to China’s currency and in fact a pre lude to ‘crypto currency’ set up, by passing Govt controls. This was a big no, no!

        • MiTurn says:

          per Gandalf (above)

          ” Xi regime is steadily going backwards on using the engines of capitalism and entrepeneurship to spur growth..”

          Yes, innovative hybrid economic model enters the test stage/world stage. It will be curious to see how all of this plays out. My thought: hubris. Xi will be disappointed, perhaps, in time, replaced?

        • Thomas Roberts says:

          There was smart people in the CCP, but, they are now gone, will be, or have sworn allegiancce to less qualified Xi lackiies.

          As for the factories in China, they are dependent on western and Japanese machinery. And japan will be much more hesitant in the future to send their new equipment there. The cost of doing business in China has become too high and new factories and equipment will be increasingly put elsewhere. Once it becomes obvious that China is stagnanting, many businesses will give up on the Chinese market dream and start pulling out. China is also dependant on foreign parts for domestic production, which will be increasingly not sold to them.

          As for the trade deficit it is big, but, not as big as it looks, because fimal assembly is in China for many things with parts from all over the world. The whole thing and not just the value added is shown in the trade imbalance.

        • Cur Mudgeon says:

          “If we can somehow coordinate with other democratic industrialized nations to stop China from stealing technology” – Gandalf

          Did they really steal it? It seems like it was handed to them on a silver platter by our “capitalists”. Western businesses wanted to produce their goods in a country virtually free of labor rights and environmental laws; where corruption was considered a virtue not a vice. Now that the servant is becoming the master, our elites, who sold out their own, are claiming that they’re victims.

        • Thomas Roberts says:

          The CCP aren’t becoming masters, they would reduce many industries to a race to the bottom and innovation would disappear. Resulting in a global depression. If they could get away with that.

          Most companies had their IP stoolen and didn’t hand it over. Some did hand it over for now broken promises of market access and some were coercced otherwise their factories and money invested in China would be taken.

          Also, there are alot of issues besides that like genociides and the CCP’s teritorial claims against 20+ countries and their claims on seas and even the artic. Their looming takeover of rivers that flow from Tibet, that will probably result in war.

          It’s not about preventing China from becoming king, it’s about preventing the CCP from dragging down the world for their own benefit and there is no reason to think average Chinese would benefit either, definitely the opposite.

        • Cur Mudgeon says:

          It seems to to me that the race to the bottom was begun here in the west, and the Chinese were the benefactors.

          Innovation would disappear? Hyperbole.

          A global depression is a very real possibility. The Chinese will have played a part, but it will be owned by a collection of greedy and cowardly elites across the globe.

          I don’t doubt that some Chinese leaders committed criminal acts and broke promises. Businessmen and public officials do that everywhere, every day. Those who chose to do business in China and were cheated deserve no sympathy. The risks were obvious. Their greed exceeded their caution.

          The Chinese government have committed and are engaged in acts which are indefensible. That is not in dispute.

          Clearly, you think we should be very concerned about the Chinese. I am more concerned about our domestic enemies: bankers, CEOS, lobbyists and our corrupt politicians. They have been waging a successful class war for the past few decades, and all the while we’ve been told to be afraid of external threats.

          “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.”

          — Warren Buffett

        • Thomas Roberts says:

          Any industry which is a race to the bottom where all IP would be stolen, is unlikely to progress forward at the old rate.

          The global depression wouldn’t last forever, probably only a 2 to 4 years, but, some countries wouldn’t come out for a longer time.

          The CCP passed the line of no return this year, when then intentionally spread CCP-19 across the world. And while, they didn’t create CCP-19 on purpose, the CCP without question, spread it and lied about it. They intentionally sent people across the western world and bought up medical supplies to create shortages in western countries, they cut off countries from supply lines which pass through china and much more. Major news sites have documented this occurring in Australia.

          The CCP cannot win, but, the longer this kind of behavior is allowed to go on, the more severe the consequences, this could mean some less developed countries across the world become unstable and some may even become nucleaar armed.

          In western countries, there is a constant struggle between various groups, but, there are standards, and despite bickering the UK and Germany are unlikely to get to actual combat. The CCP on the other hand could easily force neighbors to war. The CCP cannot win and will fall apart onto itself. The real Question is why drag this out, It’s much better to speed up the collapse of the CCP for everyone involved, including the average Chinese civilian.

    • Petunia says:

      Dano,

      Jeff Snyder does a good job of simplifying a massively obscure lending tactic in Europe.

      Basically the Europeans make loans denominated in dollars, but issued as a banking credit. The borrowers can spend these banking credits anywhere dollars are accepted. These newly created Eurodollars/credits are an expansion of the US money supply, done without US authority.

      The problem is these Eurodollar/credits have to be paid back in real dollars and those dollars don’t exist as fiat. Getting those real dollars in the FX market bids up the price of existing dollars, that are available for sale, and lifts the curtain on the worldwide shortage of dollars.

      • lincoln says:

        Bloomberg wrote a fairly good article some years ago with additional detail about the eurodollars origins:

        https://www.bloomberg.com/news/features/2016-11-29/the-man-who-invented-libor-iw3fpmed

      • Olivier says:

        Are other currencies similarly afflicted or only the dollar?

        And why is the US government, not known for being shy, especially not when it comes to asserting jurisdiction over foreign entities and whacking them with sanctions, tolerate this?

        • Petunia says:

          I only heard Snyder speak about the Eurodollar, not other currencies, so I don’t know how extensive the practice is.

          As far as I can tell, the US govt doesn’t do anything about this because they don’t understand it is happening. The fed is full of phd’s but these people know theory, they don’t have much practical experience in the field.

        • GotCollateral says:

          Other currencies are affected in various ways in the eurodollar market, collateral transformation is one way (non $ denom HY/IG swap for a $ denom HY/IG swap for a UST to be used in $ repo)

        • Lisa_Hooker says:

          I believe there was a time when Apple sold bonds denominated in Swiss Francs.

        • char says:

          It happens when a currency is used outside its home market. So mostly dollars, some euro’s, Swiss francs & yen. And a minor issue with yuan, ruble & pound.

      • Dano says:

        And I’m sure much of the derivative shenanigans depends immensely upon these Eurodollars.

        That’s why I originally dropped that in the comments here.

        • Petunia says:

          I forgot to mention this leaks into the repo markets as well, where repos are done to get dollars with govt bonds. If you need the dollars more than the bonds, this can lead to a lot of broken swaps.

  3. gorbachev says:

    New York does need the help right now,

  4. 2banana says:

    Derivatives.

    Bets in a casino.

    They produce nothing. Create nothing.

    20% of exports…

    “That is likely to be bad news for the UK’s all-important financial services industry, which accounts for more than one-tenth of the UK’s tax revenues and one-fifth of its service exports.”

    • Engin-ear says:

      Derivarives are a useful form of insurance contract extending the coverage of the traditional insurances.

      A not so harmless medium for gambling too.

      • sunny129 says:

        Ee

        Derivatives:
        Masking the structural problems in the global banking for decades and part of reasons why GFC. happened. Nothing has been addressed, just masked with more debt!
        Wonder, what’s really underneath supporting the current, 3rd largest ‘everything’ bubble created by Fed?Cbers!?

        • Engin-ear says:

          I don’t think that the structural problems were created by the Global Finance.

          Our structural problem is that the the creator of the real wealth – the real econoly – has run out of steam. Basically the market saturation and resources depletion.

          But instead of accepting the decline, we collectively chose to compensate the real economy problem by intesification of financial flows.

          We borrow more and more from our future selves, we increased the frequency of transactions and we opened widely doors of the financial gambling to every adult with credit card.

      • Rcohn says:

        You are correct , except for one little issue; the new counter parties , who are extending the insurance.
        It is inevitable that during a crisis that some of the counter parties default on their obligations . It is also inevitable that this will lead to a cascading of defaults as other counter parties who depend on the financial solvency of those on the other side of the trade also default.
        Now even this would not be a huge problem if the derivatives market was relatively small, i.e. the same size as the 1998 crisis.
        But the numbers are now so massive , in the hundreds of trillions, that a cascading of defaults will be disastrous

    • Implicit says:

      I’m sure major currency trading firms everywhere are scrambling to figure how to game the change right now. Change produces opportunities.

    • exiter says:

      Derivatives produce nothing? How else could capitalists be spawned so easily?

      It’s a prime ticket for entry to Carlin’s Wannabe Club, maybe third only to the oh-so-clever inheritance and incorporation tricks to bypass accumulation limits.

  5. MonkeyBusiness says:

    They should really build a clearinghouse, heck the whole shebang straddling the border between the UK and Ireland. Whenever trades need to be denominated in Euro, the bankers would run to the Euro side, and if the trades need to be in Pounds, the bankers would run back to the UK side.

    I am disappointed by the lack of imagination of today’s bankers. I mean haven’t we paid them enough money?

    Heck why not add a new wing to say both the German and French embassies in London eh? Embassy ground is sovereign ground no? Think about the potential. Why go to Frankfurt if you can just execute trades at a local embassy. Someone better promote me as head of ECB ;)

    • WSKJ says:

      MonkeyBusiness, the problem with your idea is that it is too easily understood. Heck, I can understand it, and I’m still struggling with the concept of derivatives.

      Need more obfuscation…lots more.

    • Implicit says:

      Add a trading house on the northern obscure border of county Leitrim in Southern Ireland on the south/north border, just like the black market other goods LOL

  6. GotCollateral says:

    Fragmentation is least of the worries for eurodollar markets… biggest issue is all the insolvent entities out there that cannot transfer of from unsecured transactions…

    Jeff Snyder bemoans regulators “forcing” this transition (while ignoring the above yet acknowledging the decline of global bank balance sheets post GFC) in eurodollar university talks (“nobody is using SOFR”)… yet the folks over at clarusft prove that this is false by actually posting transaction volumes and DIV01s

  7. c_heale says:

    The UK is so f****d.

    • Troy says:

      The UK? Hah! Make this “the financial industry”.
      Oh wait, let’s make this “Governments”.
      No, no wait! Make this “the People”. Oops, let’s reduce this to everybody “without physical gold and/or silver”.

    • Implicit says:

      Their experienced traders will probably figure a way to squeeze the EU.

    • Cashboy says:

      “The UK is so F****d”

      Lets see what happens to the EU region and the Euro over the coming years.
      I suspect that Penn will win in the French May 2021 election.
      I expect the Euro to fall against the GB pound and the US Dollar in 2021.
      More countries will be wanting to leave the EU.

      Step one is to see the UK leave with no deal or a Canadian style trade agreement.

      The UK could become the Singapore of the West.

      • fajensen says:

        The UK could become the Singapore of the West.

        Nope, the UK simply doesn’t posses the discipline required, not institutionally and not on a “personal” level either.

        Singapore is a harshly regulated place. Whereas, the UK wanted Brexit in order to be Less Regulated. More Sir Phillip Green, like!

        Whereas in Singapore, any form of slacking, workwise, morally, or just smoking in public or littering (that’s half of London getting deservedly caned right there) will be punished immediately.

        Frauds are prosecuted and will go to jail (that’s about everyone who got a Brexit- or Covid- contract from Boris Johnson’s Tory party done for). Boris Johnson himself would be in jail for his many wives.

        Impossible!

        • ChrisR says:

          Frauds are prosecuted and will go to jail…

          Even more reason for banks to trade in London. Bankers commit fraud every day, whether or not they get caught and eventually fined is another matter. Risk taking on a grander scale results in higher profitability in The City that makes it more attractive to a global banking audience.

          Singapore has chosen the stricter approach. Some people prefer that, it is admirable and a shame banking is not more like that everywhere. But Singapore’s banking market is a fraction of that in the west.

  8. A says:

    The UK is in the process of unilateral financial disarmament. I’m not sure any nation has ever done such a thing in the history of humanity.

    And it looks like the most scummy, evildoing money-laundering banks in Germany will be gainig at their expense. With the worst of them all, Deutsche Bank, at the head of the table.

    If only Hitler would have known he could have just waited peacefully 80 years and the Brits would just hand the keys to Europe over to Germany without firing a shot!

    • Wolf Richter says:

      It’s New York, not Germany, that might get the crown jewels. Recheck the last paragraph!

      • MonkeyBusiness says:

        Not sure about this. Lots of dodgy dealings involving third world countries in London. Russian oligarchs will not suddenly decamp to New York, especially under the new administration.

        Jersey might be another good choice.

    • fajensen says:

      I still like the spectacle of how the English keeps conflating Germany with Hitler, while also expecting, almost demanding, Germany to help out with a trade deal.

      I Just put on a new short, because a) There won’t be a deal, b) If there is it will be vetoed by the swivel-eyed!

  9. Joe in LA says:

    The plain fact is that the English have become consumed with self-pity about imagined slights to their sovereignty and have set about destroying themselves in retaliation. Making it hurt for themselves has become a way of showing the world how tough and in-control they are.

    Self-pity is an insane emotion that leads to all manner of self-destructive behaviors. For outside viewers, however, it will be interesting to watch the English mutilate themselves in the name of their own (largely imagined) victimhood. They may well destroy the UK with this madness.

    • EDM says:

      The UK is finished and with it it’s full NATO roll.
      History will go full circle and England be seperate.
      The defence treaty signed with Germany by Theresa May will be ended and the EU fund its own defence unless the USA picks up more of the bill under NATO umbrella.

      English voters will demand an English National Party and cease all transfers and subsidies to Scotland, NI and Wales.

      Thus will play out over the next 15-20 years.

      First is the rise of the English National Party after Brexit.
      They will still have nukes. Switzerland with nukes is how some think if it becoming.

      • SwissBrit says:

        Does anyone 100% believe that Switzerland doesn’t have any nukes tucked away deep inside some of our mountain fortresses?

        • fajensen says:

          At least if there is any country we can probably trust with nukes, it would be Switzerland.

          England … nah. It is rumoured that the USA have the bang-codes for the UK arsenal.

      • Wisoot says:

        Several witnesses have observed Unidentified Aerial Phenomena, according to the US Navy’s official definition, manipulating our own nuclear weapons with ease and even “turning them off”. Bob Jacobs. Bob Salas. Bob Jamison. Tech to keep the peace has moved on to DEWs.

  10. Rajan Sood says:

    City of London will reinvent itself.

    Its demise are exaggerated.

  11. hendrik1730 says:

    Taking some distance from all this, and considering what this is all about …. there is no reality anymore.

    The whole “financial industry” is one big bubble of fried air. It does not produce anything, it develops nothing except abstract non-contributing-to-whatever pipe dreams, it corrupts the value of money, in short, it is a ticking time bomb with a lit fuse of unknown length.

    A trillion US$ in derivatives is being marketed a DAY – that is +-30% of the GNP of GERMANY – and it’s all fried air.

    When THIS bubble pops, they will notice it on Proxima Centauri.

    • sunny129 says:

      h1730

      Nothing will pop as everything will be put under control by their ‘Extend & Pretend by captive regulators, unless there are dog- fights between ‘sharks’ and barracudas’ of the financial industry.

      Of course the, Fed/CBers ( Govts) will bail them out under the usual excuse of ‘ global financial stability’

  12. EDM says:

    Costs will rise, passed on to end customers. More friction, less efficient. Not to mention ripe for an increased EU tax reap.

    Money & custom will move where both are treated best.

  13. Norma Lacy says:

    to John Bridger Yes indeed it is amusing. Perfidious Albion et al sat on their thumbs whinging and whining for how many months? Years?
    Hahahahaha. Well let’s hope there is a bit of a crash. It would be a wonderful shopping opportunity and as Rajan Soon notes, the City will reinvent itself once again. Cheers

  14. a.hall says:

    At present Boris is fish-fingering his way to the deadline. The City of London Corporation has it`s Representative in the House of Commons, next to the Speaker`s Chair. Why hasen`t he raised the Derivatives Disaster in the Brexit Debates ? Is it because the Tory Party (the Party of Business) hasen`t a clue about Finance?

    • fajensen says:

      Technically, The City of London is not legally a part of the UK and maybe they have already finagled something based on that, which just needs the right circumstances to be kicked into motion. They may think it is better to not tell the swivel-eyed ones in the Tory party anything, because they don’t want to give them ideas on more things they can wreck?

  15. Micheal Engel says:

    1) The global gov + cb stimulus reached $10.5T in Apr, now at $11T. The global stimulus is shortening it’s thrust, the monthly dots clustered together. // $11T : $70T = 15%.
    2) SPX and the Nasdaq big Nov green, a high quality monthly bar, in
    a 4M Bearish Divergence, to be confirmed next month.
    3) NDX and the Nasdaq diverge, but both in Bearish Divergence.
    4) Iran will not start a ME action before a new president in the white house
    and June 2021 Iranian election.
    5) High jacking planes flourished in the 70’s, but after Covid and Trump actions terrorism is out of fashion.

  16. Petunia says:

    I’ve been around long enough to see there are deep markets and thin markets and it doesn’t matter where they are. There is always an intermediary that will facilitate a trade for a price.

    Dubai is now becoming more religiously diverse. I can already see where that is going.

  17. Ron says:

    Could this be the reset talked about on social media when these derivatives unwind worse than blood in the streets warren b talked about this many years ago

    • sunny129 says:

      Ron

      Much talked about but in reality, it will be managed under ‘ Extend & pretend’ policies by ISDA ( as it sees fit the needs and protection of the industry!) Read it’s previous arbitrary decisions on derfault of derivative contracts!

      • Cashboy says:

        Sunny129,

        In the UK I received a letter from the UK government, this week, informing me that there will be no extension.
        I actually hope that there will be no extension and preferably no deal.

  18. raxadian says:

    For what I have heard, the UK is likely to use the Coronavirus as an excuse to kick Brexit to the middle of next year at minimum.

    And the Euro zone will have to let them do it, due to all those companies breathing behind their back.

    Then again this is not confirmed at all so who rhe fudge knows.

    • fajensen says:

      That would be exceptionally weak of the EU and it would only result in the UK making more demands, bringing us to the very same spot next year also!

  19. I think the location or nationality of the EU derivatives clearinghouses will be way down the list of concerns should a market driven (due to currency devaluation and a big pop in rates) reversal of major market trends catch most derivatives traders with their pants down.

    Just about everyone has piled into the same side of the boat with ZIRP and negative rates ARTIFICALLY IMPOSED BY CENTRAL BANKSTERS, certainly in interest rate swaps and certainly how the VIX is currently priced. As one astute reader mentioned above, most banks, investment banks, and money managers have no idea what actual risk levels exist in their derivative contracts or what combination of events could force their derivative assets(?) toward ZERO within hours of trading on a fateful day (coming to a venue near all of us …. SOON).

    The party issuing the contract is often obscured by layers of corporate entities, and the same collateral asset is pledged so many times that there is less than 10% coverage should a default occur. This number may be out-of-date, but I have seen that there is at least $400 Trillion of outstanding notational value in derivatives of all kind in the world today. The City of London should see loss of this business as a blessing in disguise as the eventual chain of defaults begin in 2021 to EU derivative contracts. Unfortunately, the issues raised above will not be resolved before the Big Bang.

    New York is no longer a business friendly city, just see the number of people and businesses getting out and planning to get out of the Big Apple. NASDAQ looking at Texas to locate their trading platforms. When mayors and governors act like dictators in an unprecedented fashion in a so-called democracy, both the Royalists and the Serfs begin going over the castle walls. A whopper of a story for the history books.

    • Rohn says:

      David
      Let me give you an real example from the past which only reinforces your point. In 1987 I was an equity derivative trader. Going into OCT 19, I had a small amount of “negative gamma”, which meant that I was getting progressively longer and losing more and more money as the market crashed. Because I had only a small amount of negative gamma , I lost only 20% of my equity that day. I had friends who lost over 100% that same day. On Tues, OCT 20, there was a great deal of concern about the entire whether markets could even open and whether the option clearing firms were viable.Greenspan stepped in and the markets avoided a collapse.
      But now with the amount bet in the worldwide markets exponentially larger than 1987, the “negative gamma “of participants is also exponentially larger. I have seen numbers in excess of $500 trillion face value for just credit default swaps, but no one knows the true number.
      It is analogous to people skiing in an avalanche zone . Most of the time nothing happens. But when that avalanche starts, it wipes out everyone in its path. 1987 was an avalanche in the Adirondacks; now it will be an avalanche on the Matterhorn.Clearing houses will be overwhelmed by the financial demands.

      • ChrisR says:

        Be interesting to know if Brexit removes the risks of the Deutshe bank derivatives book from The City, in a way ideally that contains it within the EU? Maybe this is one of the things Brexit has been about all along. Preventing/reducing global contagion.

  20. sunny129 says:

    I have read more than once, last year or so, that CLEARING HOUSES does have enough capital to resove the dispute in derivatives/CDOs/SWAPs markets especially if there is a volatile and domino effects globally!

    It is/was thought that net effect will ‘cancel out ‘ negatives among the contracts and will have minimal disruption, but only in a slow, orderly fashion. But not in a world, where the global banking system is tightly interwoven with merky/opaque contracts.

    Brexit just adds more to that confusion. A perfect storm in the making?

    • sunny129 says:

      correction:
      ‘..CLEARING HOUSES does NOT have enough capital to resove the dispute’

  21. Rcohn says:

    I find it amusing that the German banks are said to be some of the beneficiaries .
    Anyone in the financial industry knows that the two largest German banks Deutsch and Commerz are among the financially weakest in the entire industry. When the inevitable financial crisis raises its ugly head, the problems of these two will quickly surface.
    I ask anyone, would you like to own a credit default swap whose counter party is Deutsch bank?

    • TimTim says:

      Counter party risk in many areas, as a concept, seems to be absent right now.

      I hear what you are saying.

  22. Micheal Engel says:

    1) On Nov 9 PFE vaccine US10Y jumped to 1%.
    2) This week, US1Y completing a round trip from Zanet 2011 @0.05 low to Jan 2018 high @2.75, back to 0.1 this week.
    3) Since mid Aug UST issue less bills, flipping to more 7Y – 10Y & 30Y notes & bonds.
    4) The 3M @ 0.09 indicate a Fed PhD starvation plan in action .
    5) Germany deep in NR.
    6) Germany 3M = (-) 0.75. // Germany 10Y = (-)0.6. // Underwater Plata German yield curve.
    7) US10 – DET10 = +0.84 – (-)0.6 = +1.44. //
    8) After global $11T stimulation Europe is still NR.
    9) Gravity between US & NR will send TY (US10 Futures price) up in 2021, in a new breakout if the DOW will turn down.
    10) UK 6M hit (-)0.14 this week, down from +0.88 last year.

  23. Bob Rock says:

    All derivative markets have been bailed out by central banks.
    The show must go on… until it stops.

  24. Micheal Engel says:

    1) US bills diminishing supply. // Mar to June bills overextended auction, during the panic, matured and expired.
    2) 3M is hugging zero since Mar for 9M, , > NR, shows that there is a great demand for collateral. US bills are used to kick the can down.
    3) TY (US10 Futures price) monthly chart at peak level for 9M.
    4) Draw Apr 2014 to Dec 2015 lows for support. // A parallel line from June 2016 high hit Mar 2020 high. Wow !
    5) RSI support line from Jan 2000 low to Oct 2018(C) is trending up, is another support line.
    6) Oct 1998 high and Jan 2000 low are TY LT trading range.
    7) Oct 1998 high : the large international banks BKX osc inside
    1998 hi/lo after 22 years. 1998 hi/lo were the DOW backbone.
    8) A TY Lazer aiming lower coming from June 2012 to May 2013 highs, stopped the downtrend when this Lazer & the RSI line had a date in Dec 2018…
    9) If TY breach the Lazer we get inflation. // If TY drift lower to support, TY
    backing up in bullish territory. It indicate ==> deflation.

  25. fizee says:

    This all reminds me of the recent series Gangs of London. No-one says thank you, most cannot be trusted, most players come to a sticky end and its all a bit confusing.

  26. TimTim says:

    The thought of the potential scale of the euro derivatives market makes me, for one, queasy.

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