BoE, ESMA Reach Deal on Post-Brexit Derivatives Clearing

The agreement between the BOE and European Securities and Markets Authority (ESMA) comes as a relief to UK clearing houses.

The European Union and UK’s central bank are set to cooperate on oversight of clearinghouses to avoid disruption in the cross-border derivatives market if London crashes out of the bloc next March without a deal, Bloomberg reported on Monday.

The agreement between the BOE and European Securities and Markets Authority (ESMA) comes as a relief to UK clearinghouses as they must decide whether to shift derivatives trades worth billions of euros from Britain. For instance, LCH, the LSE-controlled clearinghouse that processes around 90 percent of euro-denominated derivatives, will be outside the bloc’s legal system once Britain leaves the EU.

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Without such an arrangement, clearing houses may not get some regulatory approvals, leading to operational problems such as European banks facing much higher capital charges when they use it to process their trades.

The European regulators will make sure that important clearing houses apply the bloc’s regulations and stick to policies applied by the European Central Bank.

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“The EU will have the legal tools to oversee these firms, and ESMA said it intends to take further steps before the U.K. is scheduled to leave the EU at the end of March,” the report states.

European investors worried and UK firms struggle

Around £440 billion of euro-denominated trade passes through Britain’s clearinghouses every day thanks to so-called ‘passporting’ rules which currently allow them to sell their services freely across the rest of the EU and also give firms based in Europe access to Britain.

The rejected Brexit deal allows cross-border financial services to continue uninterrupted after March until the end of 2020. But after Theresa May failed to have her divorce settlement passed, this would leave EU customers cut off from UK-based market operators if no contingency measures were in place.

European investors were worried about being cut off from Britain’s financial markets because all the other financial centers in Europe are smaller in size. In turn, the UK’s financial services sector is struggling to find a way to preserve the existing flow of trading after the nation leaves the EU.

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