EU watchdog holds fire on derivatives action under no-deal Brexit

LONDON (Reuters) - The European Union’s markets watchdog has ruled out the need for measures to avoid potential disruption in certain cross-border derivatives contracts if Britain leaves the bloc this month without a deal.

FILE PHOTO: The financial district can be seen as a person runs in the sunshine on London's south bank, Britain February 23, 2019. REUTERS/Henry Nicholls

With Brexit just three weeks away and Britain yet to secure a transition agreement with Brussels, the European Securities and Markets Authority’s (ESMA) stance piles pressure on trading platforms to shift business from London to EU hubs.

Derivatives contracts are bought by companies to insure themselves against unexpected moves in borrowing costs or currencies, and many of them must be traded on an exchange to ensure adequate transparency for regulators.

ESMA focused on certain contracts that must be traded on authorized platforms. Most are in London and risk being cut off from EU customers in the event of a disorderly British departure from the bloc on March 29.

ESMA said most of the platforms were opening hubs in the EU to offer the same range of contracts, such as fixed-to-float interest rate swaps and credit default swap indices.

“In addition, there are already trading venues in the EU27 offering trading in derivatives subject to the trading obligation,” ESMA said in a statement.

There was therefore no evidence that users would not be able to continue meeting their obligation to trade the contracts on a platform in the EU27.

ESMA said it would continue to monitor closely how trading volumes on platforms in the EU developed after Brexit.

The bloc’s executive European Commission has so far not offered “equivalence” to British stock and derivatives trading platforms, a reference to the system Brussels uses to grant market access to foreign financial firms.

Share trading platforms in London have asked for equivalence under a no-deal scenario, though several are opening hubs in Amsterdam and Paris to provide an alternative.

So far the EU has been silent on listed derivatives trading, which is dominated in Britain by ICE Europe.

ICE has no alternative platform in the EU27 and is negotiating agreements with Germany and the Netherlands so that customers there can still trade in London in the event of a no-deal Brexit.

ICE declined to comment.

Jake Green, a financial lawyer at Ashurst, called ESMA’s stance “clearly a political statement (that) ...ignores the material operational difficulties for clients and market operators to shift trading to EU-organized trading facilities.”

The EU has said it would allow EU customers to continue clearing their derivatives trades in London for a year if there is no Brexit deal.

ESMA and the European Commission may yet give formal reassurance on cross-border stock and derivatives trading ahead of Brexit, industry officials said.

Reporting by Huw Jones; editing by Emelia Sithole-Matarise and John Stonestreet