Libor, Brexit and a renewed margin dispute

The week on, October 13–19, 2018

7 days montage 191018

Libor to become third-country benchmark under no-deal Brexit

UK-based reference rate would need to gain EU approval by end-2019 to avoid “unthinkable” disruption

Basel to propose IM offset in leverage ratio

Four sources say draft will make concession; it could also revive EU-US segregation drama

Risk of no-trade lists as banks leave Brexit plans late

European clients could face bottleneck of contract transfer requests from relocating banks


COMMENTARY: Last-minute Brexit

The big story in the UK this week was the prospect of a delay to Brexit. Formal departure is still (for the moment) scheduled for March 29 next year, but UK and European leaders seem to be planning to extend the ‘transition’ period in which the UK actually disentangles itself from the EU beyond 2020, perhaps as much by an extra year.

A delay in the process – perhaps even a delay to the formal departure date – would probably come as welcome relief to the financial sector. European banks are not yet prepared for Brexit, especially for a no-deal Brexit – in which the UK simply crashes out of the EU with no agreement in place – and have little time left in which to put this right.

It may already be too late, for example, for banks to transfer existing trading agreements and derivatives trades to EU entities, to avoid running foul of no-trade lists after a no-deal Brexit; the five months remaining may simply not be enough, corporate treasurers feel.

Libor will face problems too. Unless it gains EU approval by the end of 2019, it will become an unauthorised “third-country” benchmark, and no EU banks will be able to reference it; neither will any of their counterparties. The disruption will be “unthinkable”, one observer says.

As has reported over the past two years, Brexit will be a huge undertaking, and there is very little time to clear up every uncertainty and problem that the financial sector – let alone the rest of the economy – will face as a result.

However, it’s important to remember that the danger is not only that one or more of these issues are simply not solvable in the time remaining. Even if five months is enough, the process will inevitably involve very significant increases in operational risk. Management time is limited. Resources are limited. Human attention and energy are limited – and the urgency of completing all the tasks necessary even for an orderly Brexit will mean corners will inevitably be cut and vulnerabilities opened up.

The aftershock of Brexit will come as the costs of these operational errors are revealed – over the months and years after the final exit date. Whenever that happens to be.



Eurex supplemented its default fund in the second quarter by requiring members to stump up an extra €369 million ($424 million) in contributions. Total pre-funded capital in the central counterparty’s default fund rose to €4.5 billion from €4.2 billion (9%) in the three months to end-June.



“The risk is again overuse, or misunderstood use. This is not going to solve all problems, this is not going to take over the investing universe, and it’s not going to make investing safer. Instead of human emotions driving the markets, it will be bad algorithms” – Mihir Worah, Pimco, on machine learning and artificial intelligence.

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