Brexit Financial-Market Threat Leads EU Watchdogs to Step Up

(Bloomberg) -- After months listening to the U.K. warn about the risks posed by a no-deal Brexit, European Union financial regulators are now stepping up plans to avert a market meltdown.

Daniele Nouy, the European Central Bank’s head of supervision, set an assuring tone on Thursday when she said the ECB is “ready to help ensure a smooth Brexit -- no matter the outcome of the political negotiations.” And she’s not alone. The EU’s top markets cop called on Brussels to guarantee that the bloc’s banks don’t lose vital access to London’s clearinghouses in a disorderly divorce.

That’s a change, because up to now the EU has largely said that preparing for a cliff-edge Brexit, with no transition to give governments and financial firms time to adjust, is the industry’s responsibility. Nouy and Steven Maijoor, chairman of the European Securities and Markets Authority, signaled that EU institutions would take action if needed.

Potential Risks

The Brexit talks are entering a crucial phase, with about two weeks of intense negotiations planned to try to wrap up a withdrawal agreement before an Oct. 17 summit of political leaders. With the clock ticking down to Britain’s planned withdrawal next March, and both sides talking openly about the negotiations possibly collapsing, calls from the U.K. and industry to address the risks are growing louder.

ECB Governing Council member Ewald Nowotny said the potential risks are still underestimated. “There are many signs that the risk of a hard Brexit will become relevant,” he said.

For most of the last year, BOE Governor Mark Carney and Financial Conduct Authority Chief Executive Andrew Bailey have urged their EU counterparts to join them in promising regulatory or legislative responses to calm markets and ensure insurance and derivatives contracts can continue uninterrupted.

The Bank of England has said that a disorderly Brexit could put as much as 96 trillion pounds ($125 trillion) of derivatives contracts at risk, along with billions of pounds of insurance liabilities.

‘Transitional Provision’

The European Commission, the EU’s executive arm, has so far downplayed the BOE’s alerts, insisting that the onus is on firms to Brexit-proof existing contracts. The commission has said it “stands ready to adapt to the developments in the negotiations” and will review the situation after the October summit. A commission spokeswoman declined to comment further on Thursday.

Maijoor said this week that EU lawmakers need to adopt a “transitional provision” swiftly that ensures the bloc’s banks don’t lose access to a critical cog in world markets -- London’s derivatives clearinghouses. In a no-deal Brexit, U.K. clearinghouses could lose authorization to do trades for EU clients.

The urgency to act was thrown into sharp relief in recent days when European banks were told they need to give notice by the end of December if they intend to close positions at London Stock Exchange Group Plc’s clearinghouse, the world’s biggest for euro-denominated interest-rate swaps.

Maijoor also said ESMA would start talks with the FCA to have partnership agreements in place in time for Brexit, so they can continue to exchange information and work together on supervising financial firms. Robert Ophele, head of France’s markets regulator, likewise said EU regulators are committed to establishing cooperation agreements with U.K. authorities.

The FCA’s Bailey said on Thursday that he was “encouraged” by Maijoor’s remarks. “We’ve all been very clear that we mustn’t let Brexit cause a sort of breakdown in relations,” Bailey said.

--With assistance from John Glover.

To contact the reporters on this story: Silla Brush in London at sbrush@bloomberg.net;Boris Groendahl in Vienna at bgroendahl@bloomberg.net;Alexander Weber in Brussels at aweber45@bloomberg.net

To contact the editors responsible for this story: Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, ;Vidya Root at vroot@bloomberg.net, Patrick Henry, Jones Hayden

©2018 Bloomberg L.P.