Ring-fencing, Brexit and Chinese commodity markets

The week on Risk.net, October 6-12, 2017

Banks discount legacy swaps ahead of ring-fencing deadline: Some UK banks are offloading costly legacy swaps at huge discounts

Unwanted Kingdom: managing no-deal Brexit risks: UK-based dealers must plan now if they are to handle trades that extend beyond Brexit day

SGX commodities head: China must stop meddling with prices: Singapore Exchange’s Chin says internationalisation will necessitate new products and change pricing


COMMENTARY: Downside risk

The first upset to the Brexit timeline came on June 24, 2016, the day after the referendum itself. UK prime minister David Cameron, having promised to stay in office and trigger withdrawal immediately, instead resigned and left the job of invoking Article 50 of the Lisbon treaty to whoever might succeed him. The next prime minister, Theresa May, did not actually push the button until March this year, setting an exit date of no later than March 29, 2019.

But it’s becoming clear that the 2019 deadline is anything but that. While some UK politicians insist a “clean break” is possible – with the UK leaving the EU completely on the exit date – it’s very difficult to believe they are correct. The UK will have to arrange a transitional period (May suggests two years), during which many of the conditions of membership will still apply. But that doesn’t mean the real deadline for ‘exit’ is further off than 2019. In practice, as the financial sector is learning, it’s much closer.

As yet there is no regulatory imperative for mandatory relocation, but the euro repo market is already moving out of London – fearing that the European Central Bank will bar LCH, London’s only repo clearer, from serving EU firms after 2019. Wait and see is simply not an option – the risks of an adverse decision are too great.

And the indirect costs may also be significant. To continue swap trading operations in Europe after Brexit, London banks will have to set up an entity inside the EU – and this could face harsher supervision requirements in what many see as an ECB power grab.

One of the UK market’s biggest advantages, English common law, could also find its position under threat if negotiations drag on. Without a transition agreement, it would be treated in the same way as other third-country law, which means an additional administrative burden.

All these problems need to be resolved – and much sooner than March 2019. In reality, there is probably less than a year left if the finance industry is to have any chance of adjusting in time.



The panel of Eonia contributors has decreased from 33 banks at the beginning of 2017 to less than 30 contributors over the summer. In addition, the Eonia volumes have reached historical lows in 2017, with daily volumes below €1 billion ($1.18 billion) in the course of May 2017 due to bank holidays in some countries



“The consensus seems to be that everyone likes English law. They know how it works, they like London as a litigation forum and they like the freedom of contract English law provides” – James Greig, White & Case


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