Britain and the rest of Europe have this week been forced to face the reality of a what a no-deal Brexit would mean for the essential plumbing of the financial world.
LCH UK, which operates the London-based derivatives clearing house for interest rate swaps, let its EU members know that they could be given just three months to move £38tn in notional value of swaps contracts to other venues.
Unless there is an arrangement between the EU and UK, the notice of termination would be given sometime in late November or December.
This is not simply a matter of moving data files from one location to another. Each swap contract would have to be offset with matching positions, and the new clearing houses would have to ensure they have the correct margining and netting procedures for all the new business.
Neither the UK nor European Brexit negotiating teams seem to have grasped the size of the prospective problem.
To their credit, the European Securities and Markets Authority, the EU regulator, and the Financial Conduct Authority, its UK counterpart, have drawn up memos of understanding that could allow for something other than a legal, logistical and market liquidity fiasco.
The same agreements, presumably, would cover clearing through other UK venues, such as the London Metal Exchange.
Those memorandums, though, will need to be approved at the political and bureaucratic version of light speed. This requires a level of sanity and lack of posturing that has not been evident so far. The hard-Brexit drama may force policymakers to realise that one of their favourite post-crisis fixes, mandatory clearing of derivatives contracts, has concentrated rather than dissipated financial risk. [...]
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