The lobby group representing investment banks in Europe has added its voice to the growing calls for EU authorities to act now to stop financial market chaos in the event of a no-deal Brexit.
The Association for Financial Markets in Europe (Afme) said it is “vital” that the European Commission give assurances that clearing houses, existing contracts and cross-border data transfer will all still be allowed to function – whatever happens in Brexit negotiations.
The Commission must act before December to “ensure financial stability and avoid significant market disruption”, Afme chief executive Simon Lewis said in a letter to Valdis Dombrovskis, the EU commissioner responsible for oversight of financial services.
If the UK leaves the EU without a deal trade would default overnight to the terms of the World Trade Organisation, leaving current regulatory arrangements for financial services in tatters.
British-based central counterparties (CCPs) are particularly at risk, as there will be no legal basis for continued access to their services by EU-based banks.
Afme’s warning represents an unusually strong intervention by the banking group, coming after insistent warnings from across the City of London. British regulators and the government have already put in place guarantees that UK firms can continue to use European CCPs, but they do not have the power to force the EU to reciprocate.
London is currently the dominant location for the clearing of euro-denominated derivatives contracts, which are used by firms to manage the risks of fluctuations in currency exchange or interest rates. However, clearing has become a political battleground during negotiations, with some European policymakers considering legislation to force clearing into the Eurozone.
Lewis said that it is “essential” that the Commission act to prevent UK clearing houses from having to ditch Eurozone clients. Firms will have to start moving clients in early December, Lewis warned, with “significant adverse consequences for EU27 institutions and end users”.
The Bank of England last week warned that moving derivatives contracts worth a nominal £41 trillion from the UK would take a £19.3bn toll on European businesses.
“A legally certain solution is required for all participants as a matter of urgency,” Lewis said.