Brexit bill has a potential to affect £41tn of derivatives contracts
Last updated on December 3rd, 2018
Among the various financial disruptions occurrence as a part of Brexit a major one will be on the banking sector for both UK and EU. As per reports Bank of England has already issued the warning that very soon clearing houses of London will have to inform banks of European Union (EU) origin based in Britain to move their functions elsewhere.
The only plausible solution for avoiding this phenomenon to happen will be based on the capability of European Union and its leaders to sense and retreat the implications or else EU banks will have to bear many billions to find alternatives to the system they use in London going by the current Brexit bill.
The major EU banks are struck with the fact that EU currently is misreading the actual situation and is not ready to get over the existing system, without which Bank of England and UK government is not willing for a suitable accommodating structure. As per economic experts, Brexit bill has called for a hardline approach from EU that will cost both UK and EU but EU banks will be worse hit in this case.
It may seem like Britain lacks any major cards but we cannot ignore the fact that London has been a global financial giant and EU will need easy access to it for its own economic advantage.
The economic reparations will be huge as per available data contracts worth £69tn – that’s sixty nine trillion – are held by EU banks with British clearing houses – with £41tn falling due soon. Experts cannot disagree with the fact that the city of London itself dominates banking business in Europe now for a long time. It is no less than a giant in terms of global financial grip as compared to EU.
Going by formal records, Annually, LCH, ICE Clear Europe and LME Clear handle hundreds of trillions in swaps, covering interest rates, foreign exchange transactions, credit, and metals.
To put things in perspective, we can relate it with the clearing house processing. Clearing houses are the honest middle men brokers.
The clearing houses take a minimal commission of the transactions. They operate globally, and the vast majority of their business is from outside the EU. Global institutions like English contract law and so on.
After the last financial crisis the clearing house system was improved to meet the changes required and avoid any such crisis in future.
The London clearing houses have normally three months of notice period, considering the current Brexit bill, within which Bank of England will have to ask their EU clients to withdraw their investments, which in this case is to settle for November.
But as the EU banks will not be able to do away with contracts, they will have to find a replacement which will be a costly affair without access to London, in a much smaller pool of available capital, counter parties and intermediaries.
As Bank of England seems already worried with French banks desperately lobby the French government to arrange to continue the existing system. The EU on the other hand may loose big time given their poor address to financial issues.
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