Xavier Rolet describes the lack of the London inventory market as a “sideline” – the true Brexit barometer is swaps

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Former London Stock Exchange CEO Xavier Rolet says the loss of the city’s European stock trading crown to Amsterdam is not the right yardstick for measuring the real cost of Brexit.

“It’s a symbolic loss, but a side-effect nonetheless, given the limited contribution that listed European stock markets can make to the overall funding of European companies,” Rolet said in comments emailed to Financial News. “I would pay more attention to trading and clearing G-20 interest rate swaps as the future barometer of London’s attractiveness.”

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The Financial Times reported on February 10 that Amsterdam outperformed London as Europe’s largest trading center for stocks last month. Rolet rejected the importance of the development: “The relocation of stock trading away from London is not strategically significant in the European context.”

Rolet’s comments highlight the relatively small size of stock trading compared to the global over-the-counter derivatives market, which is roughly ten times global GDP, the European Central Bank said in a 2019 report.

With 60% of the total market, interest rate swaps were the largest segment in terms of the notional gross volume. The gross market value of OTC derivatives rose to $ 15.5 trillion in the first six months of 2020, according to the Bank for International Settlements.

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“While European markets are comparable in GDP, they trade on average a fifth of the daily liquidity of US markets,” said Rolet. “A far more significant future barometer of London’s competitiveness and global relevance will be its share of the fictitious G-20 interest rate swap trading and clearing market of $ quadrillion.”

The barometer preferred by Rolet has shown a worrying trend so far. IHS Markit said in a January 11 report that partly due to Brexit issues, some of the interest rate swap volume that used to be held in UK locations has shifted to US swap trading facilities and EU locations, mainly in Amsterdam and “to a lesser extent” in Paris.

Rolet’s comments follow a significant shift in stock trading to venues in the EU earlier in the year. Cboe data showed that around EUR 6 billion of European equity trades moved to EU locations on January 4th. That shift was “remarkable,” Aquis CEO Alasdair Haynes told FN, adding that he had never seen such a shift in liquidity overnight – 99% of Aquis’ trading volume in one day was from his UK company relocated to his Paris company. “Anyone who thinks it will come back lives in dreamland.”

The lack of an equivalency agreement for financial services in the Brexit deal has left some trading desks in the city in the balance. European stocks must now be traded in EU locations, and customers on the continent must be covered by employees who are physically present at those locations. While some of the bulge bracket banks were well prepared, smaller colleagues have been looking for solutions. This has included physically moving employees, referring business to other colleagues in the EU or, in some cases, telling customers in the EU that they simply can no longer act for them.

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It is not the first time that Rolet has warned of the risks of Brexit. He told FN in July that negotiators risked ignoring the needs of major financial services institutions.

“The simple fact that, four years after Brexit, major financial infrastructure companies are still in the dark about future frameworks seems sufficient evidence that business planning considerations are not high on the priority list of policy makers,” he said.

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A Cboe spokesperson told FN that the company “is committed to expanding both our UK and Dutch venues to continue offering competition and choice to European stock markets”. There are also plans to open a new futures exchange in Amsterdam in the first half of 2021, subject to regulatory approvals.

Xavier Rolet was Managing Director of the London Stock Exchange from 2009 to 2017.

To contact the author of this story with feedback or news, email William Canny