Brussels’ inaction risks £26trillion of derivatives

THE EU has not acted to ensure European companies and banks with derivatives contracts in the City can still use them after Brexit, putting a cloud over £26 trillion of contracts.

The Bank of England said the UK Government had made the necessary preparations but that Brussels had not reciprocated. “Material risks remain” in the process, the Bank’s Financial Policy Committee (FPC) said, with barely a year left before the UK is due to leave the EU.

The warning covers existing contracts that will still be in place on Brexit day one, and comes before considering any new derivatives put in place after the UK leaves the EU.

The Government has also committed to let UK banks continue using Eu-based counterparties for clearing services, though the bloc has not agreed to let its firms access UK banks.

“Since November, in the UK, progress has been made towards mitigating the risks of disruption to financial services,” the FPC said, in a report published a week before the next European Council meeting. “None the less, material risks remain, particularly in areas where actions would be needed by both the UK and EU authorities.”

Last year, the Bank published a list of nine important risks facing the UK and eight facing the EU. It believes the UK has taken steps towards addressing six of them, while the EU has made progress on two areas.

The UK and EU have both moved to make sure a transition period is put in place, and both are ensuring alternatives are in place for banks which have until now accessed each others’ markets through the “passport” system.

Both of them still need to take action on access to the central counterparties, which clear derivatives contracts. This could affect an additional £70 trillion of trades, including £27 trillion that mature after March

2019.

Neither party has cleared up the future rules on the delegation of fund management across borders, though the UK will allow EU funds to be marketed to British investors.

EU action is also lacking in the insurance market – its citizens risk losing access to their £55bn of policies after the UK leaves.