Brexit disruption, fire sales and climate risk

The week on, October 5–11, 2019

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EC official: supervisors must manage Brexit trading disruption

Trading obligations won’t change, but Mifid-style forbearance possible in event of disruption

Fund fears linger over guidelines set to avert fire sales

Final Esma framework allays some European asset managers’ concerns

When climate risk starts to bite

Energy firms under increased pressure to assess physical climate risk


COMMENTARY: Trick or treat?

As clocks tick down to Halloween and the supposed deadline for the UK to exit the European Union, it is not at all clear how – given efforts by Parliament to tie his hands – UK prime minister Boris Johnson could fulfil a pledge for the country to leave the bloc “do or die”.

But now, with promising noises emanating from talks between Johnson and his Irish counterpart taoiseach Leo Varadkar, the threat of a no-deal Brexit appears to be partially receding – which would be welcome news for the financial sector.

This week, reported on fallout from Brexit being felt in the deal contingent swaps market. When a US private equity group acted as suitor to a UK packaging company this year, it hedged its foreign exchange exposure from the takeover with five banks. But when the deal fell through, those banks faced potential losses from the terminated hedges, and experts predict that price premiums for this type of insurance will increase by around 20% as dealers grapple with uncertainty caused by Brexit.

On another front, if the UK did leave the bloc without a deal on October 31, trading obligations for shares and derivatives would preclude EU firms from trading on UK venues, and vice versa.

The EU’s position on trading venues differs to its attitude towards clearing houses, for which it conferred a temporary exemption to its rules. A European Commission official has said that in the event of no deal, it would be left to supervisors to respond to any resultant trading disruption, in much the same way that the industry was cut some slack with last-minute relief on transaction reporting when the second Markets in Financial Instruments Directive came into being at the start of 2018.

In so many ways, the UK was never tipped to be a winner from a hard Brexit. It has, for example, been illustrated that in a no-deal scenario the US would pick up a lot of swaps trading business, while in clearing too it might find common ground with the EU.

And it is by no means certain that even if a deal is achieved it could reverse the damage already done to the UK financial sector by Brexit preparations. As European authorities point out in explaining their decision not to grant more definitive relief in the form of short-term equivalence to affected UK trading venues, most have anyway started establishing new entities within the EU27a process that began well over a year ago.


The US entity of UK bank HSBC borrowed more cash through US money markets than any other big intermediate holding company as a share of its assets in Q2 2019. HSBC North America’s fed funds and repo borrowings were of an amount equivalent to 34.6% of its total assets at end-June; HSBC leads foreign banks in fed fund and repo borrowings.


“I want to make the message from the authorities’ side very clear. In terms of new business, and the ability to do business without Libor, people should not be waiting for the term rates” – Edwin Schooling Latter, Financial Conduct Authority, urging banks to use backward-looking versions of overnight rates in all new contracts referencing risk-free rates, rather than relying on the buildout of new forward-looking term rates to replace Libor.

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