Derivatives Industry Seeks Clarity as Pending Brexit Drags On

Bafin VP Elisabeth Roegele warned that companies need to be prepared “for all possible situations.”

More than three years after the Brexit vote, the future of London as Europe’s undisputed financial capital is no clearer.

“Industry groups fear that contingency measures .. don’t defuse the threat posed if the political storm in Westminster pushes the U.K. out of the bloc without a deal on Oct. 31,” Bloomberg reports.

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The City is pre-eminent in FX and OTC derivatives, which are used by investors to hedge their portfolios, but market participants are concerned that the pending Brexit will cause disruption in the cross-border derivatives market.

The recent agreement between the BOE and European Securities and Markets Authority (ESMA) came 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.

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

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

However, Bafin VP Elisabeth Roegele warned that companies “shouldn’t take an extension of the equivalence finding for granted, adding that they mustn’t “rely on a seamless transition,” but need to be prepared “for all possible situations.”

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 UK leaders failed to have their 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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