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09 October 2018

Financial Times: BoE warns EU that £41tn of derivatives at risk after Brexit

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The Bank of England has issued its starkest warning to date that as much as £41tn of derivatives contracts maturing after Brexit are at risk unless European officials address regulatory uncertainty.

The BoE said on Tuesday that, unless a statement is forthcoming from the European Commission, clearing houses will have to tell their European members such as banks to move their books of businesses, or risk falling foul of European law.

Ultimately, the BoE said, EU banks will bear the cost of the disruption. It cited industry estimates that suggest that for every single basis point increase in the cost of clearing interest rate swaps alone could cost EU businesses about €22bn a year.

Clearing houses must give members three months’ notice to move their business, which effectively means that any commission announcement over derivatives must happen before Christmas to allow central counterparties such as LCH to take action.

The UK government has said that it will authorise European clearing houses, and give temporary permissions for three years from 2019 that would allow financial companies to continue with their current regulatory authorisations. But no parallel announcement has been forthcoming from the EU.

While regulatory bodies such as the European Securities and Markets Authority have said they will enter into a series of memoranda of understanding with UK regulators, those are yet to be negotiated while political discussions continue. [...]

“Absent action by EU authorities to address these issues, the contracts EU clearing members have with UK CCPs will need to be closed out, or transferred, before March 2019,” the BoE wrote in its Financial Policy Committee statement on Tuesday. “The movement of a large volume of contracts in a short timeframe would be costly to, and disrupt the derivatives positions of EU businesses and could strain capacity in the derivatives market.”

Full article on Financial Times (subscription required)

Financial Policy Committee statement from its meeting

© Financial Times

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