Commission instructs lenders to face €110 trillion Brexit nightmare

WILL OLIVER

A general view of the Gherkin and surrounding buildings of London's financial centre from the top of the new Leadenhall Building also nicknamed the 'Cheesegrater' because of its distinctive shape, 09 September 2014. The Leadenhall Building is one of London's newest skyscrapers and is situated in the heart of London's financial centre.

Commission instructs lenders to face €110 trillion Brexit nightmare


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The European Union financial services commissioner Valdis Dombrovskis warned the private sector on Tuesday to lead the way in ensuring that Brexit does not trigger insurance policies on derivatives.

“The bulk of the job to adjust the business models to the post-Brexit reality still falls on the market participants,” Dobrovskis warned.

There are an estimated €110 trillion of insured derivative contracts that clients could challenge after Brexit. Financial services providers are contractually committed to servicing cross-border contracts, which are underpinned by the assumption of access to the Single Market or “passporting rights.” These access rights should expire either in March 2019 or at the end of the transition period.

That is linkage concern that threatens both the UK and EU-based financial service providers.

Therefore, contract continuity is financial services is at the top of the Brexit negotiation agenda, engaging the Governor of the Bank of England, Mark Carney, and Chancellor Philip Hammond.

The private sector has proposed maintaining current contracts under the current legal regime – “grandfathering” – although that would violate a number of British government red lines, including acceptance of European Court of Justice jurisdiction.

Not everyone is opposed to the UK maintaining access to the EU’s financial services market after Brexit. Speaking to Bloomberg on condition of anonymity, a German source told Bloomberg that Berlin would be willing to facilitate that access if the UK, in turn, accepted ECJ jurisdiction and committed to abide by EU regulations. Luxembourg is said to have a similar approach to negotiations, The Times of Luxembourg reports.

France is known to hold a more hardline position.

Currently, the main scenario is Brussels offering access on the basis of regulatory equivalence, which is a regime that allows the Commission to unilaterally limit access to the EU’s market if the UK deviates from the current regulatory regime. The UK does not want this kind of uncertainty to underpin one of its key industries.

 “It is now up to the U.K. to come up with its vision for the future, which should confirm the U.K.’s red lines or adapt them,” Michel Barnier commented on the matter during a speech in Hanover on Monday.

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