Britain is set to allow banks to continue trading derivatives in the European Union after a review this month, given that pulling down the shutters would not bring back the trillions of euros in business lost since Brexit.
Britain's trade deal with the EU since January does not cover financial services, leaving the City of London largely cut off from the bloc, which had banned EU customers from using UK platforms for trading swaps.
Hours before Britain's full departure from the EU on Dec. 31, the Financial Conduct Authority announced that despite the EU refusing to budge on its curbs, it would allow banks in London, including subsidiaries of EU lenders, to trade euro swaps on platforms in the bloc to avoid a rupture with EU customers.
As a result, Britain's share of euro swaps trading has fallen from 40% to 10% since January as volumes moved to Amsterdam and the United States, according to data from IHS Markit. Market share in the EU rose from 10% to 25%, with the United States doubling its share to 20%.
The total euro swaps market is around 135 trillion euros ($160.7 trillion), according to the Bank for International Settlements.
The FCA said in December it would consider by March 31 whether it needed to review its decision and ban banks in London from using EU swaps platforms, but industry officials say they are betting against a change of tack.
"I think it is extremely unlikely they will create a cliff edge by withdrawing it at short notice," said Kirston Winters, a managing director at IHS Markit.
"My feeling is they won't modify the current approach, that the relief for EU firms is likely to continue in the medium term," added Roger Cogan, head of European Public Policy at the International Swaps and Derivatives Association, a global industry body.
"It's as much a philosophical thing as anything else - keeping markets open," Cogan added.
A person familiar with FCA thinking said the watchdog would in any case give several months' notice to any changes it made.
The FCA, which has repeatedly stressed the need for markets to remain open, had no immediate comment.
Stopping UK banks from trading with EU clients on platforms in the bloc would make little difference in practice. It would force more EU clients to use platforms in the United States instead of the bloc for transacting with UK banks.
"Unilateral action by the UK to end allowing UK investment firms to serve EU clients on EU trading venues would likely only change the division of euro swaps between the EU and the United States, it would not bring trading of those euro swaps back to London," Winters said.
Swaps trading platforms in the United States have "equivalence" or permission from Brussels to transact business with EU clients.
Britain is waiting to see if the EU will grant equivalence for the UK as well, though market participants don't expect this to happen anytime soon for swaps and share trading.
The longer Britain waits, the more that new trading arrangements get "baked in" to devalue any equivalence and Brussels won't want euro activity returning to the City in any case, industry officials have said.
The relocation of swaps trading and 8 billion euros in daily share trading from London to the EU since January was smooth, emboldening Brussels to target the clearing of swaps next, industry officials say.
The London Stock Exchange Group's LCH arm clears about 90% of global euro swaps trades, and a quarter of LCH's notional outstanding 83 trillion euros in euro swaps are held by counterparties from the bloc.
EU policymakers want this portion shifted to rival clearer Eurex in Frankfurt and regulators like the EU's European Securities and Markets Authority (ESMA) are studying how this could be done without destabilising markets or bumping up costs for users.
($1 = 0.8401 euros)