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Uncertainty about the outcome of the Brexit negotiations has triggered questions about the legal status of derivatives contracts after the deadline of March 2019.
“At the moment, pension funds are uncertain about where and when they must clear their contracts,” said Max Verheijen, head of financial markets at Cardano. “Pension funds must prepare for every scenario by concluding flexible clearing contracts.”
Any transfer of derivatives contracts between trading venues would be expensive, he said.
As London has the largest market for derivatives, pension funds’ transactions with investment banks are usually subject to British legislation.
Earlier this year, the Commission proposed that pension funds were made exempt from central clearing regulations, brought in under EMIR, until 2020. These require all derivatives trades to be conducted through a central clearing house.
Verheijen said: “If the current exemption from mandatory central clearing for pension funds until August 2018 were not to be extended, central clearing must take place in London, where clearing house LCH has a 95% market share for schemes that have already started central clearing.
“In case of a hard Brexit, the European Commission wants these contracts [to be] subject to European legislation, as it doesn’t want to be dependent on British legislation if a British clearing house goes bust.”
In this case, contracts with LCH would have to be transferred to central clearing parties based on the European mainland.