The EU cannot offer an equivalent of the clearing for the processing of trillions of dollars worth of derivative contracts
The EU cannot offer an equivalent of the clearing for the processing of trillions of dollars worth of derivative contracts often between major institutions.
After repeated warnings from the Bank of England, the chairman of the European Securities and Markets Authority has finally admitted to an audience in Athens that he needs the global clearing facilities available in London for the stability of EU financial markets more than the other way round. He is asking for a transition period in the event of no deal.
It is the public admission of a realisation that has no doubt been the case for some time that EU financial institutions currently have access to a global financial centre in London which will disappear under EU rules if Britain crashes out of the European Union without a deal.
If a transitional arrangement is not found then there is a chance that some of these contracts will behave in similar fashion to trades that were undone by the Lehman collapse.
I was working in an institutional stockbroking firm at the time and it was as though one side of an unsettled trade simply died. The broker who employed me was acting as agent then had the challenging options of buying in or selling out to replace Lehman’s failure or advising the client that the counterparty with whom the transaction was made had failed and that it was his problem, neither particularly attractive. The former option also left the possibility of that trade being completed at some unknown time in the future by the administrator with the attendant problems of time and incremental and uncontrollable capital adequacy issues that holding a large unsettled trade that the delay might bring.
Given the experiences of Lehman I would be inclined to warn financial institutions who are outside the EU that have derivative contracts that will mature after Britain’s departure date that have been struck with institutions inside the EU if they do not know already. In this way a certain degree of unwind/replacement/repositioning could take place. There are multiple reasons why an unwind and an EU alternative may be difficult to find and this is because London is a global financial centre. The EU does not have the expertise. If there was a ready alternative the chairman of the European Securities and Markets Authority would not have said what he did in Athens.
No deal Brexit would have the effect of cutting the EU off from London a global financial centre which will continue trading with or without EU based financial institutions and cannot currently be replicated within the EU.To my mind this is a major bargaining chip that should be exploited by Britain.