The Bank of England turned up the pressure on the European Union to deliver legislation within weeks to avert a breakdown of access to London’s crucial financial infrastructure in a no-deal Brexit.
“By early to mid-December, there would have to be enough certainty about the form of the legal instrument” the EU will use to ensure U.K. clearinghouses can continue serving clients in the bloc in the event of a disorderly divorce with no transition period, BOE Deputy Governor Jon Cunliffe told lawmakers in London.
U.K. regulators have been warning for more than a year that a no-deal Brexit could threaten trillions of dollars of derivatives contracts and millions of insurance policies. The European Commission, the EU’s executive arm, has promised a solution based on so-called equivalence rules for clearing and securities settlement.
Clearinghouses such as LCH Ltd., a unit of London Stock Exchange Group Plc, stand between the two sides of derivatives trades and hold collateral from both in case a member defaults. LCH’s dominance of euro-derivatives clearing turned the issue into a flashpoint in the Brexit talks, as EU politicians said more of that activity should take place within the single market.
While the U.K. and EU agree on the risks for cleared derivatives, they still don’t see eye to eye on non-cleared contracts, where the BOE sees a “material” threat, Governor Mark Carney said in a hearing at Parliament on Tuesday. The European Commission has said that no contingency measures will be needed for non-cleared “over-the-counter” derivatives or insurance policies.
On the BOE’s own efforts to get the U.K. financial system ready for a possible no-deal Brexit, Carney said the necessary steps had been taken.
“We’ve been preparing for it since the day after the referendum effectively,” Carney said. “We’re quietly confident that we have in place all the measures we could have in place.”
The BOE on Nov. 29 will provide Parliament with an analysis of how the draft withdrawal agreement will affect the central bank’s ability to deliver on its mandates for monetary policy and financial stability. The BOE brought forward the publication of the 2018 stress-test results by a week to Nov. 28, because its Brexit analysis draws on these results.
Carney said these reports “will provide as much information as is needed to make judgments about the capital-liquidity position of the core of the banking system.”
–With assistance from Catherine Bosley and Linly Lin.
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