The upcoming Brexit referendum has not affected the volume of sterling foreign exchange options against the euro or US dollar according to an analysis of US swap data repositories by Clarus Financial Technology.
The UK government has announced that a referendum on the UK’s membership of the European Union will be held on 23 June in which voters will decide whether to remain or leave.
Analytics provider Clarus Financial Technology cleansed and analysed the data from US swap data repositories on over-the-counter FX options. SDRs were created in the US by the Dodd-Frank financial reform act in order to provide a central facility for swap data reporting and record keeping for both cleared and uncleared swaps, including FX swaps and forwards.
Chris Barnes at Clarus said in a blog that the average monthly volume this year of EUR/GBP FX Options around the referendum date is$30.5bn, plus $9bn already traded in March, compared to an average monthly volume in the fourth quarter of last year of $25bn.
“Given the unknowns associated with a Brexit, I thought we’d see more of a clamour towards insurance type of structures,” he added.
Clarus also did not find a larger percentage of activity in GBP/USD options relative to the other major currency pairs.
“The uncertainty is baked into the price of the underlying, not in the activity of options. GBP/USD is historically weak, which is associated with periods of political uncertainty,” added Barnes.
He said EUR/GBP has already rallied aggressively since last year but another reason could be that even if the UK votes for Brexit, the split from the EU would not happen for another two years according to the relevant treaties.
TheCityUK, the lobbying body which represents the UK-based financial and related professional services industry, has produced ‘A Practitioner’s Guide to Brexit’.
The report said: “Our analysis shows that leaving the EU could risk damaging UK financial services through uncertainty, reduced market access and a loss of influence over the conditions of trade. The actual process of renegotiating access to the Single Market and negotiating simultaneous free trade agreements with other trade partners would be a resource and time-intensive exercise.”
The financial industry accounts directly for 11.8% of UK GDP, employs nearly 2.2 million people and is the nation’s largest tax paying sector – contributing £66bn ($94bn) in the tax year 2014/2015 according to the study.
“Despite the fact that the European Single Market in services has not yet been completed, the UK has reaped great benefit from its ability to access the Single Market, in particular through financial and other services’ trade and investment,” added TheCityUK. “The EU is the most important destination for UK exports of financial services, generating a trade surplus for the UK of £18.5bn.”
There are also 250 foreign banks operating in London and more than 200 foreign law firms have offices in London and across the UK. All major euro area banks have branches in London, and UK banks are leading players in financial markets of the euro area. Out of 155 foreign banks authorised to take deposits through a branch in the UK, 75 are from the EU and they hold over £1.1 trillion in assets or 17% of total bank assets in the UK.
“If the UK were not part of the EU, some of the activities of these banks would probably be diverted to other European financial centres or could disappear altogether as markets suffer decreased ability to intermediate financial transactions effectively,” said the report.
Membership of the EU also allows service providers which are authorised in one EU member state to offer services in the rest of the EU without seeking separate authorisation from other national regulators and allows for a range of products, such as Ucits funds, to be sold across the EU. The UK is a major location for the management of Ucits-compliant funds and London also accounts for around 90% of European prime brokerage.
“If UK-based firms were to lose the benefit of the passporting regime, they would be unable to automatically supply services in the EU from the UK on a cross-border basis,” added The CityUK.”UK-based firms would also lose protection against discrimination as the passports guarantee incoming firms will be able to do business on the same terms as local ones. This means that UK-based firms (including subsidiaries of non-EU businesses which have set up offices in the UK to access the Single Market) would face regulatory and prudential barriers which can impact the viability of their businesses.”
If the UK were to leave the EU, there is no certainty that a new arrangement would be established for the UK to preserve fully its current EU passporting rights. “In the event of such an agreement, the EU would expect ‘equivalence’ of standards from the UK. This implies that the UK would effectively still have to comply with EU regulatory standards and would thus have limited scope to set its own standards,” added the CityUK.
Mark Carney, governor of the Bank of England, told a parliamentary committee yesterday that some activity could leave the City of London if the UK votes to leave. He said: “There are views that have been expressed publicly and privately by a number of institutions that they would look at it. I would say a number of institutions are contingency planning for that possibility – major institutions, foreign headquartered, which have their European headquarters here.”
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