U.S. Markets

U.S. regulators warn over 'Brexit' risk to global markets, companies

WASHINGTON (Reuters) - Two top U.S. regulators called on Britain and the European Union on Thursday to ensure a path forward for Britain’s exit from the EU that would minimize disruption for financial firms and markets, emphasizing the need for clarity and stability.

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In unusually punchy statements, the chairs of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) separately said Brexit was already having an impact on some U.S. companies and investors, and that the risk to global markets was underestimated.

“The potential adverse effects of Brexit are not well understood and, in the areas where they are understood, are underestimated,” said SEC chair Jay Clayton in a speech delivered in New York.

He added it would be a “tall order” for the EU and UK authorities to provide a path that minimized disruption and costs if they failed to come up with a transition geared towards broad, long-term economic stability.

Earlier on Thursday, CFTC chairman Christopher Giancarlo said Brexit uncertainty could create instability in the global derivatives market and urged the EU and Britain to agree terms “in a manner that provides sufficient legal and regulatory certainty” to markets.

Prime Minister Theresa May’s government has agreed on a Brexit deal with Brussels, but there is a strong chance it could be rejected by parliament when it is put to a vote next week, political analysts say. Concerns that Britain will leave the EU next March without a deal have hammered the pound and could cause dislocation in global markets, regulators and business leaders have warned.

Last week, the U.S. Federal Reserve said that a no-deal Brexit posed near-term risk to the U.S. financial system by disrupting cross-border financial services arrangements and potentially undermining confidence in the euro zone’s fiscal and financial prospects.

Brexit worries are adding to already jittery global markets that have been roiled by fears over a breakdown in U.S.-China trade relations and weak oil prices, with the U.S. Dow Jones stocks benchmark dropping 1.8 percent on Thursday.

The CFTC is the primary regulator of the U.S. derivatives market, which is the world’s largest and is deeply interconnected with markets around the world. The regulator is worried that changes to the terms of cross-border EU-UK derivatives rules after Brexit could have ripple effects globally market since UK clearing houses also operate in the United States and Asia.

In particular, the EU has said it will still allow EU trades to be pushed through UK clearing houses after Brexit, even if Britain is not able to reach a final deal that would establish cross-border financial rules.

On Thursday, Giancarlo said the EU needed to provide greater clarity on the details of that arrangement, including which products would be included and how long it would last.

“This additional clarity and certainty are necessary to limit substantial operational and market risks that will result from the sudden transfer of potentially trillions of euros in swap exposures in the remaining weeks before a possible no-deal Brexit,” he said.

Reporting by Michelle Price and Pete Schroeder; Editing by Chizu Nomiyama, Dan Grebler and Sonya Hepinstall