The EU has confirmed it will grant the derivatives industry more time to prepare for a potential no-deal Brexit, saying that emergency access to crucial UK market infrastructure would last for one year after Britain drops out of the bloc.
National officials have approved draft plans from the European Commission to scrap an existing March 2020 expiry date for the measures, arguing that the sudden loss of access for European companies to UK clearing houses would pose a threat to financial stability.
Instead, the access rights would now apply for 12 months from the day a no-deal Brexit happens, whenever that may be. EU diplomats said the measures will be signed off by Brussels in the coming days, providing much needed certainty to industry.
The reprieve is significant for Europe’s financial services industry as London is a global hub for clearing derivatives like futures and swaps. The notional value of the EU derivatives market rose 11 per cent to €735tn in 2018, according to data from EU regulators this week.
UK clearing houses LCH, ICE Clear Europe and LME Clear are core parts of the infrastructure of the financial system, standing in the middle of financial trades and cushioning the impact if a counterparty defaults. They handle the vast majority of euro-denominated interest rate and credit swaps, and commodity futures.
The emergency contingency measures are needed as EU regulations ban European companies from using non-EU clearing houses unless they have been judged by Brussels as being properly regulated and supervised.
A draft of the new plans, published on the commission’s website, warns that potential risks to financial stability are “likely to persist after 30 March 2020”. The sector needs “legal certainty and predictability for a sufficient period of time following a potential withdrawal”, the document says.
EU officials underline that the measure would only be relevant in a no-deal Brexit scenario, and that the bloc’s hope is that this would never come to pass. The EU has negotiated two Brexit deals with successive British prime ministers, and the UK is currently scheduled to leave the bloc on January 31.
The draft EU decision leaves the door open to further extensions of the emergency measures but also warns they may be more restrictive, saying that the union will be alert to the risk that dependence on UK-based clearing houses could pose “a systemic risk to the union”.
Separately on Thursday, the EU confirmed it would give tougher powers to its regulators — including the European Securities and Markets Authority — to monitor overseas clearing houses such as LCH, including the possibility to relocate some clearing activities inside the EU as a last resort. The powers will come into effect on January 1.
The EU’s executive arm will be expected in coming months to create follow-up technical measures that contain the tougher rules.
