Bundesbank Says Brexit Deal Could Keep Swaps Clearing in London

  • Dombret says intensive supervisory cooperation would be needed
  • Such an agreement could obviate need for relocation of firms

Bundesbank Executive Board member Andreas Dombret said an agreement should be reached to prevent Brexit from disrupting financial clearing services, which are currently dominated by firms in London.

Such a deal would be built on “intensive cooperation” between European Union and U.K. supervisors, Dombret said in Frankfurt on Wednesday. It would also have to include “far-reaching powers of information and intervention for EU supervisors vis-a-vis” central counterparties in the U.K., he said.

Andreas Dombret

Photographer: Krisztian Bocsi/Bloomberg

“To the extent that this is assured, I am convinced that this could obviate the need for a large-scale relocation of clearing business, at least from an economic standpoint,” Dombret said. “The reverse naturally also applies.”

The European Commission has proposed a new policy of oversight of major clearinghouses after Britain’s vote to quit the EU, including a potential requirement that contracts denominated in EU currencies are cleared within the bloc. The issue has become a major battleground in Brexit talks and a challenge to London’s status as a financial hub.

‘Material Risks’

Clearinghouses such as those operated by London Stock Exchange Group Plc, CME Group Inc. and Deutsche Boerse AG stand between the two sides of a derivative wager and hold collateral, known as margin, from both in case a member defaults. The collateral is intended to protect against the potential for one party’s default to spread risk throughout the system.

The Bank of England warned this week of “material risks of disruption to the provision of clearing services” in Europe in the absence of an agreement that ensures the continuity of cross-border services.

“If continuity of access is not maintained, a loss of permissions could interfere with EEA clearing members’ ability to meet contractual obligations to the CCP,” the BOE said in a report, referring to the European Economic Area, which comprises the EU countries plus Iceland, Liechtenstein and Norway.

“Separating EEA clients from others could make it harder and more costly for them to maintain hedging and matching positions,” the BOE said. “These challenges mean that substantial risks of disruption of cross-border clearing activity remain.”

Dombret said that where Brexit drives a wedge between the EU and U.K. economies, “bridges need to be built post-Brexit,” and clearing presents such an opportunity, Dombret said. “The door needs to be left open for a close and deep partnership with the United Kingdom,” he said.

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