UK Clearinghouses Poised to Gain Breathing Room Ahead of Brexit

With ongoing Brexit Brexit Brexit stands for British Exit, or in reference to the United Kingdom’s decision to formally leave the European Union (EU) as declared in a June 23, 2016 referendum. In a more immediate sense, a tight vote and unexpected result helped drive British pound (GBP) to lows that had not been seen in decades.The day following the referendum, former Prime Minister David Cameron resigned from office where he was replaced by Theresa May, who later resigned from office on June 7th, 2019. Active Prime Minis Brexit stands for British Exit, or in reference to the United Kingdom’s decision to formally leave the European Union (EU) as declared in a June 23, 2016 referendum. In a more immediate sense, a tight vote and unexpected result helped drive British pound (GBP) to lows that had not been seen in decades.The day following the referendum, former Prime Minister David Cameron resigned from office where he was replaced by Theresa May, who later resigned from office on June 7th, 2019. Active Prime Minis Read this Term discussions consuming the focus of the broader trading industry, there is at least one segment that can garner reprieve. UK-based clearinghouses are expected to receive an extension of an extra year to prepare for a no-deal Brexit, per a Bloomberg report.

The news is noteworthy, given the lingering uncertainty tethered to the Brexit situation. With virtually anything on the table at this juncture, contingency plans justify a significant boon towards European institutions.

What this means for UK market infrastructure

For starters, UK-based clearing houses will likely draw an extension beyond the existing March 2020 deadline. The primary rationale for this move is due to the EU financial services industry not having any viable alternatives over this timetable.

This stance was echoed by Valdis Dombrovskis, Vice-president of the European Commission, given the concentration of derivatives being processed in the UK. Indeed, London has served as the de-facto hub for Swaps Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Read this Term clearing, constituting a €640 trillion market.

As has been the case in a variety of circumstances surrounding Brexit, Mr. Dombrovskis did, however, not commit to a new end date or deadline for the ‘emergency’ measures.

More than likely, however, this interval will reflect an additional year from the end date, which is seen as the strongest likelihood in what has been a largely convoluted process.

Previously, the UK clearing market was headed for a period of uncertainty, given the rapid approach of the February 1 deadline. Presently, the UK is poised to break with the EU on this date, regardless of any deal being reached.

The acceptance of an extension would buy much-needed breathing room for UK clearinghouses, likely targeting March 2021 as a new date.

Few alternative options

It would be nothing short of a cataclysmic outcome to see defaults reverberate across the market with any disruption of UK clearinghouses. These institutions, namely, LCH, ICE Clear Europe, and LME Clear, reflect the most integral names across the entire financial infrastructure.

The aforementioned clearinghouses are also bound by existing regulations that prohibit European companies from using clearing houses outside the European Union, pending Brussels’ approval.

Unfortunately, the fate of clearinghouses is just one layer of an entire domino chain of elements across the financial industry that hinge on a Brexit decision being made.

Indeed, both the Bank of England and the European Central Bank have repeatedly warned of risks to the stability of the entire system without sufficient access to clearing measures.