The UK is “cautiously optimistic” it will get the EU’s permission for the City’s clearing houses to continue to process trillions of pounds of derivatives for EU customers after Brexit, Bank of England deputy governor Sam Woods said today.
The London Stock Exchange’s LCH unit holds positions worth £57 trillion on behalf of clients in the bloc. But it will need permission to continue clearing for them when the post-Brexit transition period ends in December.
Speaking to a House of Lords committee hearing on the UK’s future financial relationship with the EU, Woods said: “Unfortunately, that issue will come back again in September because firms need a bit of time to act if the solution is not put in place.”
But he added that he was “cautiously optimistic that our colleagues in the EU will deal with that one”.
If the EU does not grant the UK equivalence, LCH would have to give its EU customers notice by September that they should shift their business to clearing houses acknowledged by the bloc.
Woods also said that the Bank of England does not think it can “have confidence of maintaining financial stability if we have no say over the rules” that the UK’s financial sector is subject to, given its size and importance to the British economy.
Speaking at the same hearing, Andrew Bailey, head of the City regulator and incoming governor of the Bank of England, said that everyone involved in negotiating the future relationship of EU and UK financial services “recognises that there’s quite a long way to go”.
“There have been noises made by the EU that they will treat us differently,” Bailey said. “We don’t know what that adds up to in practice but that’s another reason to be alert and sensitive”.
Michael Thomas, a partner in Hogan Lovell’s financial services team, welcomed Woods’ optimism that UK clearing houses would be recognised by the EU as “the alternative would cause disruption for both UK market infrastructure, and EU clearing members”.
“However, it is worth noting that equivalence assessments can be used as a negotiating tool,” he continued. “But hopefully, both sides will be incentivised to be pragmatic here, given the importance for EU firms of continuing access to the UK capital markets and associated market infrastructure.”