ICE chief Jeff Sprecher warns London risks losing derivatives lead

London risks losing its position as the world’s leading centre for derivatives trading amid an onslaught of new European regulations, one of the world’s biggest exchange operators has warned.

Jeff Sprecher, chief executive of New York-listed Intercontinental Exchange, said business was already moving to the US and Asia. That shift would accelerate unless new rules, such as the European Union’s Mifid II rule book, were toned down.

“Europe is going one step further in trying to inject a new [competitive] market structure into trading . . . that will be different from the rest of the world,” he told the Financial Times. “I think it really competitively hurts Europe.”

ICE, which has its headquarters in Atlanta, Georgia but the bulk of its operations in London, was founded by Mr Sprecher 15 years ago. It has become one of the world’s top three exchange groups, with a market capitalisation of $25bn and ownership of the New York Stock Exchange.

Over the past decade, Mr Sprecher has spent millions of dollars developing London-based trading benchmarks, such as the industry-standard Brent oil contract. “I would never do that again in Europe,” he said. “I’m betting that a lot of business will gravitate towards Asia.”

The cumulative effect of the regulations means London-based contracts could in future “easily be 80 per cent more expensive” in terms of the “margin” or collateral that trading clients are required to deposit to underpin a trade, Mr Sprecher said.

The US and Europe have similar rules on derivatives, but Mifid II will add an extra layer of European regulation in 2017. Clients would vote with their feet, he predicted. “It’s amazing how sensitive the market is to these changes in collateral. Europe immediately becomes non-competitive,” Mr Sprecher said.

London hosts a wide range of derivatives trading, from commodity futures to over-the-counter interest rate swaps. Nearly half of the world’s OTC interest rate derivatives trading takes place in London.

But the City’s grip on European credit default swaps, another traditional area of strength, is already weakening. About $3tn of the $19tn CDS market has been routed through ICE’s US operation, rather than London, in recent months.

In April, ICE will launch a handful of futures contracts in Singapore, including a copycat version of its flagship Brent crude contract.

Any hit to the City’s dominance in derivatives would come amid a bitter debate about its future as a banking centre. Last week it emerged that both Barclays and Royal Bank of Scotland were considering big cutbacks in their investment banking operations.

The predicted cost inflation around London-based derivatives trades is founded in a complex interplay of new rules, designed to make the system safer.

In part, the rules address the knock-on effects of separate bank regulations imposed in the wake of Lehman Brothers’ collapse. These force banks to process trades through clearing houses, the post-trade outfits that guarantee safe delivery of contracts and payments, rather than conduct them bilaterally with clients.

The European Market Infrastructure Regulation has obliged clearing house clients to deposit more “margin” as a safety buffer, while Mifid II would add further capital requirements.

ICE last week submitted critical comments on the minutiae of the proposed rules to regulators at the European Securities and Markets Authority. Mr Sprecher said he was drafting a personal letter to Esma to express his dismay at the big-picture ramifications.