No-deal would flip EU27 users into different regime for UK-listed trades
Banks, trading platforms, repositories tee up EU entities – and dread the repapering crunch that would follow
NSFR could also be finalised before year-end; final stress capital buffer rule expected in early 2019
COMMENTARY: The war on sanity
The prospect of a no-deal Brexit continues to cause challenges for dealers caught in the crossfire between the UK and its European neighbours.
It has become apparent that some of the UK’s listed derivatives would be redefined as over-the-counter instruments, increasing costs for end-users in the European Union and potentially creating a compliance minefield.
The issue was flagged by the European Commission in February, but has since been overshadowed by the debate around post-Brexit OTC clearing.
Rules governing OTC swaps would not easily translate across to listed products – and firms might find adding the notional volumes together will catapult them through thresholds for clearing and margining mandates. As a result, EU27 users could be cut off from sourcing exchange-traded products in London if dealers find it too demanding to offer them.
Meanwhile, preparations for a no-deal Brexit are touching other parts of swaps trading. On the frontline, some banks plan to deploy London-based specialists to “chaperone” EU salespeople on deals “beyond their sphere”. Others banks will move a mix of sales and specialists, although some may avoid moving people at all – instead ‘dual-hatting’ their London staff, so they can serve EU and UK entities. A lot depends on the nuances of where trades are booked. Dealers say they will have to keep some risk in their EU entities, which could affect liquidity and pricing for EU clients.
As the clock runs down, anxiety is also growing about the final phase of this work: a redocumentation race in which clients sign up to trade with new counterparties.
The potential fallout from Brexit is also reported to have led the Commission and Council of the EU to prioritise legislation on the supervision of foreign central counterparties over the resolution regime to deal with those financial market infrastructures in the event they fall down. France favours giving CCP supervisory responsibilities to the European Securities and Markets Authority, but Germany does not want to concede powers that the Bundesbank has over Frankfurt-based Eurex.
Worryingly, until CCP resolution rules enter into force, national resolution authorities are unprepared to intervene in a crisis situation if they feel the need, as the rules may not be completed until at least 2020.
STAT OF THE WEEK
European banks further improved the quality of their loan portfolios in the first six months of the year, continuing a trend that began in 2015. The average ratio of non-performing loans to total loans shrank to 3.6% – its lowest level since the European Banking Authority started publishing the data at end-2014. Figures from the watchdog’s Risk Dashboard show the change in the ratio was driven by a €67 billion ($77 billion) drop in soured loans across the region.
QUOTE OF THE WEEK
“There’s been less innovation in US Treasuries than any other asset class I’ve been involved with. Why should we have confidence that anything is going to change now after all these years” – David Rutter, former head of BrokerTec