Trade bodies representing bankers, traders and swaps dealers across Europe are demanding a legal lifeline from the EU to prevent Brexit chaos in the €660tn derivatives market.
The lobby groups have urged the European Commission to give legal certainty to London-based clearing houses — which process the majority of derivatives trades in the EU — that they will still be able to work for EU clients even if the UK leaves the trading bloc without any agreed political deal.
The need has become urgent, the groups warned, because UK clearing houses may otherwise start issuing cancellation notices to their EU-based members before the end of 2018. With UK Prime Minister Theresa May facing an uphill battle to get her Brexit deal through Parliament on December 11, the prospect of no deal remains a risk.
London is home to Intercontinental Exchange’s ICE Clear Europe, the London Stock Exchange Group’s majority-owned LCH, and the London Metal Exchange’s LME Clear, which are among the most important global clearing houses. They process and guarantee trades, forming a crucial part of the world’s financial architecture.
The Bank of England warned in October that EU clearing members would have to close out or transfer £41tn of derivatives positions at UK clearing houses without action from Brussels.
Although the Commission pledged on November 13 to take action to prevent disruption to clearing, the lobby groups said in their letter that they “remain concerned” that UK clearing houses may decide to terminate their EU members. That is because EU rules dictate that clearing houses require authorisation from EU authorities to have members based in the bloc.
The letter to European Commission vice-president Valdis Dombrovskis was sent by the International Swaps and Derivatives Association, the Futures Industry Association, the Association for Financial Markets in Europe, and the International Capital Markets Association.
The lobby groups expressed specific concern about what would happen in the event the UK left the EU without agreement on a transition period.
They urged the Commission to provide legal certainty by publishing its “proposed temporary equivalence determination for the UK” as soon as possible, and called for the Paris-based European Securities and Markets Authority to confirm that ICE Clear Europe, LCH and LME Clear are recognised under EU clearing rules.
Isda, FIA, Afme and Icma warned: “Abrupt cessation of access to UK [clearing houses] has the potential to introduce widespread disruption for [European Economic Area] markets.”
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