European Capital Markets

Major changes have occurred in European capital markets as a result of Brexit and these changes are by no means at an end. Banks’ implementation of their Brexit plans has introduced or increased inefficiencies in their operating and business models.

At this stage, four months after the end of the Transition Period, there is no doubt that the UK remains the largest capital markets hub in Europe. However, some capital markets activity has observably migrated from the UK to the EU. The report highlights new data and analysis from IHS Markit on the OTC interest rate swap market, which shows that trading volumes at UK venues have declined, with EU and US venues having gained market share. Overall, more trading went to US than EU venues. The market for GBP and EUR interest rate swaps has become more geographically fragmented, while the market for USD interest rate swaps has become more geographically concentrated. There has been little or no change in where OTC interest rate swaps are cleared, with the vast majority still cleared on UK CCPs.

European capital markets are not yet in a steady state, and a variety of regulatory and supervisory factors will continue to influence how they evolve. The Intermediate Parent Undertaking (IPU) requirement is already prompting in-scope banks to explore restructuring options, while how booking model supervision evolves could prompt further changes to bank practices. We also await key EU developments, for example, in relation to the EU’s exposure to UK CCPs and on portfolio delegation.

Banks will need to respond to these ongoing issues in an uncertain environment. The report concludes with recommendations for banks to:

1. Review and optimise legal entity structures to ensure they have the right legal entities, permissions, risk model approvals and infrastructure needed to support their clients, deliver their strategic ambitions, and meet other regulatory requirements (e.g. on resolvability);
2. Optimise the distribution of activities across jurisdictions and legal entities, including within IPU sub-groups (where relevant) and between UK and EU entities; and
3. Identify growth opportunities and align European footprints with global strategies, looking beyond near-term regulatory and supervisory pressures resulting from Brexit.

Looking forward, EU, and to a lesser extent UK, authorities face a choice: whether to proceed with more open or more closed financial services ecosystems. In this paper, we spell out the contours of each approach, and argue that a more open approach between the UK and EU, and between the EU and the rest of the world more generally, will provide more flexibility for banks to achieve a better balance between regulatory and commercial considerations and to provide a broader range of services at lower cost to their customers.