Libor demise and Brexit reshape derivatives market, says BIS – Reuters

LONDON, Oct 27 (Reuters) – Brexit and the demise of Libor are reshaping the world’s over-the-counter (OTC) interest rate derivatives market, where daily turnover totalled $5.2 trillion in April, down from $6.4 trillion in April 2019, the Bank for International Settlements (BIS) said on Thursday.

“The most significant factor contributing to the decline in turnover is the continuing shift away from Libor for major currencies,” the BIS said in its latest triennial snapshot of the global OTC interest rate derivatives market.

Banks and their clients use interest rate swaps to insure themselves against unexpected moves in borrowing costs.

After banks were fined for trying to rig the London Interbank Offered Rate, or Libor, the bulk of the benchmark’s permutations were scrapped at the end of 2021 and replaced with rates compiled by central banks.

Replacing Libor shrank turnover in forward rate agreements or FRAs, a type of derivatives contract, with turnover in dollar FRAs tumbling by 98%.

BIS OTC Derivatives Graphic 1

Sales desks in Britain recorded the highest turnover of interest rate derivatives, at $2.6 trillion, or 46% of global ‘net-gross’ turnover, down from 51% in 2019.

“Turnover in U.S. dollar swaps has partially shifted from sales desks in the United Kingdom to the United States and Asian financial centres,” the BIS said.

“Similarly, turnover in euro swaps has shifted from the United Kingdom to the euro area.”

Brexit from the end of 2020 meant that EU banks could no longer trade OTC derivatives in London, forcing them to trade on platforms in the United States in some cases.

Turnover in euro contracts reached $1.8 trillion per day in April 2022 to 34% of global turnover, up from 25% in 2019, as dollar contracts fell from roughly half of the global market in 2019 to 44% in April.

Turnover of euro rate swaps in Britain fell 18% to $1 trillion over the three years, while turnover by dealers, particularly in Germany and France more than tripled, from $124 billion in 2019 to $385 billion in 2022.

Euro-denominated contracts, excluding FRAs, traded in euro area countries accounted for more than a quarter of the global total, the highest share since 2010, BIS said.

BIS OTC Derivatives Graphic 2

Reporting by Huw Jones; Editing by Toby Chopra

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