UK regulator wants derivatives deal to avert Brexit 'cliff edge'

LONDON (Reuters) - A deal between Britain and the European Union to allow 20 trillion pounds of derivatives contracts to run their course after Brexit will be critical to avoid a disruptive “cliff edge”, a top British regulator said on Monday.

Andrew Bailey, chief executive of the Financial Conduct Authority, speaks at his office in London, Britain, September 25, 2017. REUTERS/Afolabi Sotunde

Andrew Bailey, chief executive of the Financial Conduct Authority (FCA), said the issue of potential derivatives contract disruptions after Britain leaves the bloc in March 2019 cuts both ways.

“It is an issue for us but also for the EU,” Bailey told the Reuters Financial Regulation Summit.

“This can be sorted out in the terms of the agreements, as it were, but it does need to be sorted out. As a conduct regulator and a macroprudential regulator, I do not want to see a situation where we face a cliff edge on contract certainty.”

Bailey also sits on the Bank of England’s Financial Policy Committee (FPC), which said on Monday it was examining what to do about contracts if Britain left the bloc in with no future trading arrangements.

“In areas where it would be complex and difficult for firms themselves to mitigate risks fully ... the FPC is exploring other mitigating actions,” the FPC said in a statement.

About a quarter of uncleared derivatives contracts held by UK and EU clients could be affected, and the BoE is working with industry body ISDA on finding ways to avoid a cliff edge, though it has so far not make public any “solutions”.

“A comprehensive solution is likely to require the development and passage of legislation in both jurisdictions in order to protect the long-term validity of existing contracts,” the FPC said.

A UK-EU deal would allow contracts negotiated before Brexit to be “grandfathered” or run their course normally. This would prevent companies and their banks having to rewrite many thousands of contracts, a feat that has never been done in the time left before Brexit in 2019, the BoE said.

ISDA Chief Executive Scott O’Malia said the way existing contracts perform after Brexit may be interrupted.

“It’s important that provisions are put in place that allow UK and EU counterparties to perform on their existing contractual obligations,” O’Malia said.

“ISDA is working with its members to determine the impact.”

The derivatives most affected are uncleared swaps used by companies to “insure” themselves against unexpected moves in interest rates, currencies or prices of raw materials.

The FPC said there was a similar issue with cross-border insurance contracts, and insurers have told Reuters they need clarity by November. [nL8N1LB3JQ]

The FPC also said that financial firms lack robust contingency plans to mitigate risks to services from possible barriers to the flow of data between Britain and the EU after Brexit.

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Reporting by Huw Jones; editing by Jane Merriman and Alexander Smith