12 December 2018

Financial Times: Derivatives traders to get one-year market access in no-deal Brexit

EU governments agreed on Wednesday that the bloc should grant “equivalence” rights that would temporarily maintain EU companies’ access to UK-based clearing houses, thereby buying time for markets to adapt.

The one-year reprieve would apply from the day Britain leaves.

London dominates European swaps and futures clearing, handling the bulk of the €660tn market. Clearing houses, such as London’s LCH, ICE Clear Europe and LME Clear, are therefore some of the most critical institutions in the financial system, given the role they play as middlemen for trades in derivatives contracts and other securities.

The measure is the latest sign of Brussels stepping up its no-deal preparations as fears of a chaotic British exit from the EU rise.

Donald Tusk, the president of the European Council, told EU leaders on Wednesday that “time is running out” for a negotiated exit, and that he had put no-deal planning on the agenda of a summit that starts in Brussels on Thursday.

The access rights — confirmed by three people familiar with the talks — are longer than many in the financial sector were expecting. They are double the six months that Brussels is planning to offer Switzerland, whose stock exchanges will be cut off from EU banks and brokers at the end of 2018 unless Brussels takes an equivalence decision.

The plans are set to be confirmed by the European Commission on December 19, and would apply to all classes of cleared derivatives. UK clearing houses also need to be approved by Esma, the European regulator, to ensure that EU traders can use them in the event of a no-deal Brexit.

Clearing services “are critical for ensuring financial stability”, says a copy of the plans seen by the Financial Times. “A disruption in the provision of clearing services could also affect the implementation of central banks’ monetary policy.”

Brussels was under pressure from central banks, brokers and clearing houses to provide clarity on clearing access, with traders warning that there was no alternative venue for some types of contracts and that transferring positions in derivatives portfolios would take months.

Two people familiar with the talks said the aim of the 12-month window was to give the financial system enough time to adapt, and that the access was strictly temporary. [...]

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