EU Plans One-Year Derivatives Fix to Prevent Brexit Rupture

(Bloomberg) -- London’s derivatives clearinghouses could be allowed to continue serving big banks in the European Union for 12 months after a no-deal Brexit, as part of the EU’s preparations to avert turmoil in financial markets, according to three people with knowledge of the matter.

The plan, if formally adopted by the European Commission, would be a reprieve for London’s main clearinghouses -- units of London Stock Exchange Group Plc and Intercontinental Exchange Inc. as well as the London Metal Exchange. Industry groups and U.K. regulators had warned that without legal certainty from the commission, EU banks would need to start this month closing out contracts cleared in the U.K.

The commission, the EU’s executive arm, settled on the duration of a so-called equivalence decision for U.K. clearinghouses in a meeting on Wednesday with officials from EU member states, the people said. Equivalence, a judgment that a non-EU country’s rules and supervision are as robust as the EU’s, is part of the procedure the bloc uses to grant foreign firms access to the single market.

Walt Lukken, chief executive officer of FIA, said the derivatives-industry group is “highly encouraged by the action of the European Commission to grant temporary and conditional equivalence status that will not disrupt these essential markets.”

FIA also hopes “other necessary steps for timely recognition” of U.K. clearinghouses “will follow shortly,” the group said in a statement. In addition to the equivalence finding, firms must also gain “recognition” from the EU markets regulator to do business in the bloc.

Spokespeople for LSE, ICE and LME declined to comment. A spokesperson for the European Commission didn’t immediately respond to requests for comment by phone and email.

EU clearing members have over-the-counter derivative contracts with U.K. clearinghouses with a gross notional value of 60 trillion pounds ($76 trillion), 45 trillion pounds of which will mature after March, according to the Bank of England.

The year of continued clearing access would allow EU banks, who rely on infrastructure in London for the majority of their euro-denominated derivatives deals, to adapt to the new situation. It would also give EU policy makers time to complete rules that would give them more control over clearinghouses outside the bloc.

Information Exchange

A draft of the equivalence decision seen by Bloomberg set out conditions including the “effective exchange of information and coordination of supervisory activities” between EU and U.K. authorities.

The commission and EU member states also agreed to give U.K. central securities depositories 24 months of single-market access in the event of a no-deal Brexit, the people said. Ireland has relied on a U.K.-based firm called Crest to settle trades since the 1990s.

The plan would give a reprieve to Euronext NV, the owner of Ireland’s stock exchange, which has said it favors moving the settlement of Irish shares to Brussels after Brexit.

©2018 Bloomberg L.P.