Part 2: What will Brexit mean for European exchanges (futures version).

New thread. 1/n

Following on from this raised by @hidenotslide.
Part 1 (Equities) was last night. https://twitter.com/HideNotSlide/status/1344357616600965123

The original Reuters story cited the 1998 Battle of the Bund, when futures trading in German Bunds (long end of the curve) went from Liffe in London to Eurex in Frankfurt v quickly.

Even though EU regulators haven't recognised UK future exchanges as equivalent, that big market shift is unlikely to happen again on Monday.

For futures markets the absence of an equivalence decision means access to the market is going back to the way things were pre-2007 when the Single Market financial services “passport” was created.

UK regulators will let UK investors trade on EU exchanges, no issue there. Going the other way, exchanges like ICE Futures Europe and LME have licences from individual EU states where needed, like Germany and Netherlands.

But there is a caveat; it wouldn't be market structure land without one. Absent equivalence, when EU investors trade futures like Brent crude, metals or gas, those deals will be treated as over-the-counter derivatives and not exchange-traded derivs.

Generally this jacks up the costs all round - margin requirements, capital treatment - so it's going to get more expensive for EU customers.

This is where the EU's stance is harder to fathom than in the equities market. Equities are cash products, settled in two days and flow can be moved v easily, as Monday will show. A share traded on venue X is still the same as a share traded on venue Y.

This doesn't apply to futures. Here, concentration rules as contracts are open for months at a time, need to be risk-managed with margin, and positions can be offset. If you dominate liquidity in a product, you pretty much dominate it entirely, generally speaking.

Part of the reason why liquidity moved so v quickly in 1998, and why it only moved at the long-end and not the short end of the curve.

And here's the thing; there is no EU alternative to Brent oil futures or metals on the LME. Neither company is moving those contracts and the EU can't force a private company to move its own commercial product.

ICE isn't moving the Brent futures contract from London, it knows where its customers are. For them that's as much about the US, Switzerland, Asia etc as the EU.

And if the EU is trying to build up an alternative, like it is doing with shares, well...it takes years to build liquidity in futures markets.

To go back to 1998 Bund as an eg, everyone brings it up as it was one of the few times it happened. That was the last century. And it was market-led, not a regulatory requirement.

I've lost count of the number of failed efforts exchanges have made to shift futures liquidity in this contract or that. It's really rare.

So perhaps Monday will see the first step in a long road in the EU loosening its reliance on London, in this corner of financial services. But it's fighting the flow and norms of the market and hasn't even started.

If anything, I'd expect the corporate voices in the EU who are most affected to get louder. But we shall see. End of thread.