Moving Swaps Out of London in No-Deal Brexit Just Got Easier

(Bloomberg) -- The European Union’s markets cop is lending a helping hand to traders moving derivatives contracts out of London to get ready for a no-deal Brexit.

Rule changes proposed by the European Securities and Markets Authority would make it cheaper and easier for EU banks, funds and other traders to replace U.K. counterparties with new ones in the EU. The change is needed because U.K. counterparties may no longer be able to provide certain services across the EU in a disorderly divorce, ESMA said.

The proposal shows how EU regulators are beginning to lay out contingencies for a no-deal Brexit after months spent telling the industry to resolve its own problems regarding trillions of dollars of derivatives contracts. The Bank of England and U.K. authorities have repeatedly pressed the EU for legislative solutions, saying that the problems are too large for firms to solve themselves.

While ESMA’s proposal is welcome, and will remove one big obstacle to transferring contracts from the U.K. to the EU, more needs to be done, according to Roger Cogan, head of European public policy at the International Swaps and Derivatives Association, the industry’s main lobbying group.

‘Significant Hurdles’

“There are other significant hurdles that affect the ability to transfer so many contracts in the limited time to Brexit day, despite industry efforts,” Cogan said.

The fix proposed on Thursday for non-cleared, over-the-counter derivatives would apply only in a no-deal scenario, when U.K. firms might immediately lose the authorizations needed to service contracts across Europe.

ESMA’s proposal is a response to a situation where the act of moving a trade might force it to be settled at a clearinghouse instead of being done directly between the two parties. It would free European traders for 12 months from having to use a clearinghouse for trades that are shifted.

The plan is intended to avert a panic in markets at the moment when Britain leaves the EU and to help traders control costs, ESMA Chair Steven Maijoor said in a statement. ESMA sent the proposal to the European Commission for approval. It’s also subject to scrutiny from the European Parliament and EU member states.

The European Commission said recently that it intends to help European banks maintain access to U.K. clearinghouses for derivatives. The commission, the EU’s executive arm, has also indicated that trades that aren’t guaranteed at clearinghouses like those run by the London Stock Exchange Group Plc or Deutsche Boerse AG do not present a cliff-edge risk.

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