U.K. Gets Brexit Break After EU Opens Door on Derivatives
(Bloomberg) -- The European Union has granted cross-border access to London’s crucial derivatives market, but warned that other swathes of the financial industry have a long way to go to secure post-Brexit agreements.
The European Commission, the EU’s executive arm, said on Thursday it will allow European traders to access U.K. clearinghouses, which have a dominant role in settling trillions of dollars in contracts. The London Stock Exchange Group Plc’s clearinghouse is the world’s primary place for settling swaps in dollars, pounds and euros.
“This decision is being taken to address the possible risks to financial stability related to the specific area of derivatives clearing,” Valdis Dombrovskis, executive vice president at the commission, said in a statement. He added that access will be granted on a time-limited basis, without specifying how long that would be.
The financial industry has said for years that cross-border access to clearinghouses after Brexit, through the process known as equivalence, is essential to prevent global market disruption. This week, a lobby group for banks and brokers active in the market said the decision needed to take place by the end of the third quarter, earlier than the official year-end deadline for an agreement.
The EU underlined that clearing is the one area where it’s prepared to grant cross-border access for the moment, and that it has no intention of doing so in the “short or medium term” on a range of other financial activities.
Michael McKee, a partner at DLA Piper in London, said that while the move on clearinghouses was positive, it “is not necessarily an indicator that agreement can be found on other financial services issues.”
The European Central Bank separately warned that the temporary access to clearinghouses doesn’t mean banks can stop getting ready for the end of the transition period. Executive board member Yves Mersch said in a blog post on Thursday that some banks “still have much work to do” and that relief given in the course of the coronavirus outbreak doesn’t extend to “essential end-of-year Brexit preparations.”
Staff relocations to the euro area can only be delayed in case of new lockdown measures or travel restrictions, according to Mersch. He also said banks shouldn’t rely too much on equivalence as it “does not constitute a sustainable basis for their business models,” given that regulatory frameworks on both sides may drift apart.
Meanwhile, Michel Barnier, the EU’s chief Brexit negotiator, said this week’s discussions with the U.K. have confirmed “significant divergences” remain between the two sides. “We will continue working with patience, respect and determination,” he said in a tweet.
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