UK Could Align With US Clearing Standards Post-Brexit

Shanny Basar

After the UK leaves the European Union, the country could change its clearing rules to match those of the US to increase trading activity, rather than just trying to meet EU requirements, according to Carla Jane Findlay-Dons, chief global regulatory and market strategist at Brown Brothers Harriman.

Findlay-Dons noted there has been much debate over the location of clearing of euro derivatives after Brexit on the US bank’s On The Regs blog.

CJ Findlay-Dons, BBH

She wrote: “In a post-Brexit world, the UK would be free to move its rules to match that of the largest over the counter trading bloc (the US) to foster increased activity between both countries on trading (likely to include Europe also) rather than try to appease the EU solely.”

The European Union has proposed that systematically important clearing houses that clear euro derivatives have to be located in the EU after Brexit.

SwapClear, the interest rate clearing business of London Stock Exchange Group, clears the vast majority of swaps globally, including euro contracts. As a result Eurex Clearing, the clearing house owned by Deutsche Börse, has launched a partnership program last year to build a liquid alternative for processing euro denominated interest rate derivatives in the remaining EU27.

“But there is a wider debate between the US and the EU regarding clearing standards,” added Findlay-Dons. “The Commodity Futures Trading Commission, the US over-the-counter and clearing regulator, has grown increasingly agitated with the EU as it tries to harmonize the rules to the benefit of global trade.”

The EU has also proposed significantly enhanced requirements on the supervision of clearers from outside the trading bloc.

Christopher Giancarlo, chairman of the US Commodity Futures Trading Commission, said in a speech in May that he was worried about US CCPs being subject to overlapping EU regulation and supervision without due deference to CFTC oversight. The EU and the CFTC agreed a common approach to regulation in 2016 to ensure that global liquidity was not fragmented.

“We spent three years working on that agreement and remain committed to it,” he said. “We do not want to renegotiate it.”

Hard Brexit

The Brexit negotiation period is due to come to an end on  29 March next year when the UK leaves the EU. Findlay-Dons said: “With just over six months to go, and no signs of firm agreement thus far, a no-deal Brexit is a very real possibility. At this point in time, there is no published plan for what happens if an October or December deal is rejected by one side or the other.”

She continued that if UK asset managers do not have funds set up under EU-domiciled management companies, any existing Ucits funds will become alternative investment funds and can no longer be distributed into the remaining EU27 member states.

“These restrictions would also apply to EU managers wanting to trade in the UK,” she added. “A no-deal Brexit is a two-way street with losses on each side.”

Findlay-Dons also noted areas where the UK could change regulations to its advantage after Brexit. For example, she gave the example of a “Ucits Lite” product which could reduce fund costs and increase returns. She also suggested some form of Commonwealth funds passport.

“Among Commonwealth members are some financial heavyweights (Australia, Canada, India, New Zealand, and South Africa) as well as certain rapidly developing nations showing high growth and savings rates spread across Asia, Africa, and the Americas,” she added. “It’s also worth noting that many of the Commonwealth states are similar in terms of legal basis and systems of business to the UK, so it’s not inconceivable that the UK could coordinate a passport fairly quickly.”

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