Any Brexit-fuelled exodus of the derivatives market from London to the European mainland will start with currency contracts, according to Dutch asset manager Achmea IM.
Erik-Jan van Dijk, manager of treasury and derivatives at the €130bn investment house, said currency contracts would likely move from London to Frankfurt, Dublin and Paris, ahead of interest rate swaps.
“Currency contracts usually have a duration of three months, whereas interest swaps span a period of decades,” he said.
If the UK exits the EU without a full withdrawal agreement – the ‘hard Brexit’ scenario – pension investors could be restricted from dealing with London-based banks for rolling forward existing contracts and concluding new ones.
Contracts that are currently being negotiated with a London bank will expire towards the end of April. By then, the option would be to strike a new contract with an EU-based office of the same bank.
Van Dijk said that legal documents enabling pension funds to trade in derivatives must be copied to the German, French or Irish branches of the bank in question.
Achmea IM has hundreds of so-called ISDA/CSA contracts with international merchant banks, half of which are located in London.
“During the past year, we have been busy converting these contracts while carefully checking whether clauses would not substantially change at the expense of our clients,” Van Dijk said.
Several banks have applied for a licence with Dutch regulator AFM, which would enable Dutch pension investors to keep on trading with companies based in London, he said.
According to Van Dijk, only a few US banks have applied for such a licence.
He said it was possible that, even with a ‘soft’ Brexit, an increasing number of derivatives transactions would be made through European bank offices.
“As long as uncertainty remains about the final conditions of the UK’s departure from the EU, it is sensible to conclude transactions with these European offices,” he said.
Van Dijk argued that Brexit would mark a point of no return, regardless of whether it was ‘hard’ or ‘soft’.
“Only if Brexit is cancelled do I expect the level of the derivatives trade through London to remain unchanged,” he said.
A paper published by the EU in December set out contingency plans for a hard or ‘no deal’ Brexit. It stated that derivatives counterparties based in the UK would be able to continue to do business with EU investors for 12 months after Brexit through a “temporary and conditional equivalence decision”.
In addition, UK-based security depositories would get a 24-month reprieve as part of the EU’s contingency plan.