The Bank of England ratcheted up the pressure on the European Union to help stave off the threat a no-deal Brexit poses to trillions of pounds of derivative contracts and millions of insurance policies.
The EU has made “only limited progress” in mitigating the financial-stability risks of a disorderly Brexit, and the need for action is now “pressing,” the BOE said. The U.K. regulator has been warning for months that a disorderly Brexit with no transition period could put financial contracts at risk, disrupt clearing and complicate the transfer of crucial data across the Channel.
On clearing, urgent EU action is needed to remove legal uncertainty about whether the bloc’s banks could continue to use London clearinghouses after Brexit, the BOE said. U.K.-based firms such as LCH Ltd., a unit of London Stock Exchange Group Plc, dominate the lucrative business of clearing of euro-denominated interest-rate swaps.
While the U.K. has announced steps to reduce the risks, including a plan to issue temporary licenses if needed, the EU has largely insisted that it’s up to industry to prepare for the worst. That has started to change in recent weeks, however, as EU regulators talk openly about preparations for the divorce.
Steven Maijoor, chairman of the European Securities and Markets Authority, said a transitional access deal is needed so continental banks and trading venues aren’t cut off from London clearinghouses. Daniele Nouy, the European Central Bank’s head of supervision, said the ECB is “ready to help ensure a smooth Brexit — no matter the outcome of the political negotiations.”
Absent EU action, EU banks would need to close out or transfer the contracts they have with U.K. clearinghouses, the BOE said. “This will be costly to EU businesses and could strain capacity in the derivatives market, it said.
That warning was echoed on Tuesday by the International Swaps and Derivatives Association, which said that the “migration” of thousands of contracts would result in higher costs and pose significant operational challenges.
For all the risks, the BOE’s Financial Policy Committee on Tuesday reiterated its judgment that the U.K. financial system “would be strong enough to serve U.K. households and businesses through a disorderly, cliff-edge Brexit.”
Other key takeaways from the FPC statement:
- Given the resources needed for banks and regulators to get ready for Brexit, the BOE will delay the start of next year’s stress test to September 2019, with results to be published in June 2020
- The results of this year’s stress test will be published on Dec. 5
- The committee is concerned by the rapid growth of leveraged lending, including to U.K. businesses, and will assess any implications for banks in this year’s stress test
- It maintained the U.K. countercyclical capital buffer at 1 percent, and will review the rate at its Nov. 28 meeting.
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