London faces fresh EU battle over lucrative derivatives market

The future of one of the City’s biggest and most profitable markets – trading and clearing derivative contracts – could come under threat next year unless the UK can carve out a new deal with the EU.

In the first half of 2024, the London Clearing House (LCH), part of the London Stock Exchange Group, cleared $799tn (£630tn) of transactions, up 15pc on the same half of the previous year.

The strength of the LCH has confounded critics of Brexit, who expected wholesale trading of financial contracts focused on London to fracture and move to centres such as Frankfurt and Paris.

The unwillingness of German and other regulators to take on the risk of dealings on less developed platforms meant the exodus never happened.

The right of London to trade derivative contracts generated by financial institutions based in the EU rests on a temporary waiver by Brussels and European financial regulators.

That deal expires in June. If there were a hiatus in talks on ‘equivalence’, European banks would be able to access derivative clearing using ‘active account requirement’. These largely backup accounts allow commercial firms to use a European clearing house.

‘The market has been growing, so has the number of participants, clients and members. That business continues to do very well,’ a London Stock Exchange Group source told the Daily Mail.

Nevertheless, to secure the LCH’s future, Britain will need a more permanent ‘equivalence’ deal with the EU to allow European-based banks and financial groups to retain access to LCH trading.

The importance of derivative trading to London is hard to calculate. But it means banks from across the globe deploy trading teams in the Square Mile to close deals and manage the risk on their books.

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

Officials hope the issue of equivalence – where European regulators deem UK regulation to be equal to that on the Continent – can be resolved.

But some Continental financial centres regret UK domination of derivatives. Another fear is that negotiations in this highly technical area could be caught up in broader efforts by Keir Starmer’s Government to have close economic ties to our former EU partners.