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3rd July 2024 | Insights

Where are the opportunities for European market participants today?

Acuiti recently partnered with the FIA to conduct a study into the key trends in European listed derivatives markets. The report was based on a survey or interview with senior executives at over 100 European firms across the buyside, sellside and software and infrastructure pr­oviders.

Much has been made of the relative lack of growth in European listed derivatives markets versus those in the US, where options in particular have seen astronomical growth since 2020. However, the study found a market that was optimistic about the future of European markets and one that was innovating to stay competitive.

There were some signs of weakness within attitudes to European markets. As one would expect, many respondents pointed to the potential to grow their business within Europe, but three types of firms saw more potential outside Europe.

Respondents working for sell-side firms, which includes both bank and non-bank brokers and clearing providers, ranked client growth outside Europe as the top opportunity for growth over the next five years. The buy-side, comprising hedge funds and asset managers, expressed the same view.

In addition, respondents working for principal trading firms displayed a similar view — pointing to volume growth in non-European markets as the key growth opportunity for their firms.

However, growth in Europe remains a key opportunity. For the sell-side and the buy-side client growth in Europe was the 2nd most attractive opportunity today. Meanwhile for exchange client growth in Europe was the top opportunity. Principle trading firms were more sanguine on Europe but still ranked volume growth in Europe as their 5th biggest opportunity.

Another key issue for firms in Europe has been the burden of regulation. The study found a broad consensus across the industry that the combined impact of multiple sets of regulations has created a major challenge for the industry.

Overall, 53% of respondents to the survey ranked the regulatory burden as the top issue facing their firm and only 30% agreed that the level of European regulation on their firm was proportionate.

When it came to regulation, the European capital regulations contained within IFR/IFD was the most challenging for firms to deal with, followed closely by the Digital Operational Resilience Act.

For principal trading firms, IFR/IFD has constituted a major compliance burden, with significant implications for the prudential requirements that these firms have become subject to under the new EU prudential regime for investment firms.

The capital implications of the regulation, as well as the overall burden of compliance, have pushed several principal trading firms to give up their MiFID II licences or relocate their headquarters or certain trading desks outside the EU.

Brexit is also providing a drag on London, according to a majority of survey respondents. 69% of respondents predicted that Brexit would have a long-term negative effect on London’s stature as a global financial centre. Paris was the city that most respondents thought would gain the most from Brexit followed by Amsterdam.

However, amid the challenges, there was optimism among market participants in Europe. Respondents to the survey predicted growth in energy and interest rate derivatives over the coming five years.

In addition, firms are looking to new asset classes, such as crypto and carbon for growth. Crypto was a polarising issue with 25% of respondents saying that it had the most growth potential in Europe and 26% saying it had the least.

However, with the EU’s regulatory framework for digital assets, MiCA, coming on stream from this year, Europe is among the first major jurisdictions to put in place a comprehensive regulatory framework for trading crypto.

This is resulting in growing interest from the sell-side. One of the most surprising findings in the study was European banks’ increasing openness to offering crypto derivatives trading to clients.

Almost 40% of respondents from banks were currently evaluating getting involved in crypto derivatives markets. This likely reflects the upcoming launch of new onshore regulated markets such as D2X and GFOX, the latter offering traditional clearing into LCH.

Another driver of growth in European markets is innovation. Views on technology trends vary significantly across the industry. Clearing brokers and other sell-side firms are prioritising gains in efficiency from their investments in technology. In contrast, principal trading firms and exchanges are more interested in innovative new technologies such as artificial intelligence and blockchain.

Overall, just 12% of respondents disagreed that artificial intelligence would be transformational for derivatives markets while 24% thought the same for blockchain and DLT.

While the regulatory burden in the EU in many areas creates additional cost and complexity, when it comes to blockchain and AI, EU rules are creating a framework in which firms can innovate and currently the number of venues offering or building tokenised concepts is higher in Europe than in the US as a result.

So, while European listed derivatives volumes have not grown in line with those in the US, there are good reasons behind the optimism in European markets for growth over the next decade.

The disruption of Brexit is passing and EU politicians have indicated a more pragmatic approach to regulation may be on the horizon. What the changing governments across Europe may bring for listed derivatives remains unknown, but market participants are resilient and innovative and ready to meet the challenges they face.

To download the full report, visit: https://www.acuiti.io/state-of-the-market-european-derivatives-2024/