The European Union said it won’t allow a no-deal Brexit to cut the bloc’s banks off from London’s crucial financial infrastructure, which would put trillions of dollars of derivatives contracts at risk.
The European Commission, the EU’s executive arm, will ensure that financial firms don’t lose access to clearinghouses such as LCH Ltd., a unit of London Stock Exchange Group Plc, even if political negotiations break down and Britain quits the bloc abruptly next March, a commission spokesman said. Banks and U.K. regulators have been warning for months that EU action is needed to avert turmoil in financial markets.
The Brussels-based commission would only ensure clearing access on a temporary basis to “address financial stability risks arising from an exit without a deal,” commission spokesman Johannes Bahrke said by email on Tuesday. Any short-term fix would be based on the EU’s so-called equivalence rules, which can allow firms outside the bloc to provide services to the single market, he said.
Banks welcomed the commission’s commitment to maintain the cross-Channel clearing link. But acknowledging the potential threat isn’t enough, according to Simon Lewis, head of the Association for Financial Markets in Europe, a trade group whose members include BNP Paribas SA and Deutsche Bank AG.
“It is now important to provide clarity to market participants on the timing and details of the approach that would be taken,” Lewis said.
Bahrke gave no specifics on when the commission might take action on clearing, saying only that the time remaining before Brexit day is “sufficient” to deal with the issue. The Financial Times reported the commission’s position earlier based on comments by Vice President Valdis Dombrovskis.
Clearinghouses such as LCH stand between the two sides of derivatives trades and hold collateral—also known as margin—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.
EU-based firms have derivatives contracts with a notional value of 69 trillion pounds ($88 trillion) at U.K. clearinghouses, with about 41 trillion pounds of that maturing after the U.K.’s scheduled withdrawal next March, according to the Bank of England.
The commission’s pledge is the latest indication that EU regulators will step in to maintain financial stability even after officials have insisted that firms were responsible for addressing the threats that a no-deal Brexit would pose to insurance policies and derivatives contracts as well as data sharing.
Steven Maijoor, the EU’s top markets regulator, said earlier this month that a transitional access deal is needed so EU banks and trading venues aren’t cut off from U.K. clearing.