Financial markets face Brexit day upheaval if clearing houses in Britain are abruptly cut off from continental customers, a senior JPMorgan bank official said on Wednesday.
Sally Dewar, international head of regulatory affairs at the U.S. bank, said that without European Union recognition of UK clearers before Britain’s departure from the bloc in March 2019, there could be significant market disruption.
Under current EU rules, a British clearing house could not obtain this recognition until after Brexit.
“The lack of recognition could lead to market disruption on Day One, and that’s why we can’t predict the extent of it,” Dewar told a House of Lords committee.
Clearing houses like LCH and ICE Clear ensure that trillions of pounds of financial transactions are completed safely, and Dewar said they will need transitional arrangements.
JPMorgan and its peers who serve customers across Europe from a base in London are now activating plans to avoid disruption in customer links, such as by setting up new hubs or expanding existing ones in the EU.
“Clearly there is a ticking clock. We are already in execution mode in terms of the infrastructure, licenses, approvals that we need,” Dewar said. Some key decisions on moving staff have also been taken.
“But by the end of Q1 (2018) we have to start taking decisions around informing clients, which becomes more difficult to unravel,” Dewar said.
She acknowledged that if EU trades cannot be booked in London, it would mean a loss of tax revenue for Britain.
The European Central Bank, which licenses banking hubs in the euro zone, said in a newsletter on Wednesday that it was “not comfortable” with booking models being proposed by lenders who want to continue using London after Brexit.
Julian Adams, group regulatory and government relations director at UK insurer Prudential, said the financial industry also needed to know how “inoperables,” or issues only governments can resolve, will be dealt with. These include ensuring that cross-border insurance contracts still work.
The House of Lords committee is looking at how UK regulation should be shaped after Brexit.
Dewar and Adams – both former UK regulators – signaled differences over this, reflecting how JPMorgan will have significant business in the EU27 after Brexit, while Prudential is more focused on Britain and Asia.
Dewar said Britain should not diverge too much from EU rules otherwise it would undermine its ability to reach agreement with the EU on financial services trade.
Adams, however, said there was no point in Brexit unless it gave British regulators leeway to tailor rules, while avoiding a “race to the bottom.”
The objectives of UK regulators after Brexit may need broadening beyond “safety and soundness” to include the competitiveness of London as a global financial center, Adams said.
“There is a debate to be had about whether competitiveness or the promotion of London as a financial center could and should be part of a Brexit regulatory landscape,” Adams said.
UK regulators have said there must be no return to the “light touch” era seen before the global financial crisis forced Britain to bail out under-capitalised banks.
(Reporting by Huw Jones; Editing by Hugh Lawson)
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