UK and US markets regulators have finalised a sweeping long-term agreement to jointly oversee each other’s derivatives markets after Brexit, removing concerns of financial turmoil in the $481tn market if Britain leaves the EU without an agreement.
The accord will close off risks of massive disruption to banks, institutional investors and corporations, which use derivatives like swaps and futures to hedge against movements in interest rates and currencies.
The two sides, which together account for the majority of the global derivatives market, unveiled their deal in London on Monday. The agreement is set to begin when the UK leaves the European Union on March 29.
UK clearing houses LCH, ICE Clear Europe and LME Clear, act as middlemen in the securities and derivatives markets, preventing the rest of the financial system from being hit if one institution defaults on payments.
“The US and UK have special responsibilities to keep their markets resilient, efficient and open. The measures we are announcing today will do that,” said Mark Carney, governor of the Bank of England.
The agreement comes as the EU aims to finalise tougher rules for overseas clearing houses, drawn up after the UK notified the EU it would leave the bloc. However some of the EU proposals for more direct regulation have been resisted by both UK and US regulators, which prefer regulators to “defer” main oversight of derivatives markets to local authorities. They would then closely co-operate with their peers.
“London is, and will remain, a global centre for derivatives trading and clearing,” said Christopher Giancarlo, chairman of the Commodity Futures Trading Commission, the main US derivatives regulator. “They provide a bridge over Brexit through a durable regulatory framework upon which the thriving derivatives market between the UK and the US may continue and endure.”
The UK-US agreement will see the UK give permission for US investors to use US derivatives trading venues and clearing houses that provide services in the UK. American regulators will issue “no action” relief letters that exempt UK market participants from complying with certain US market rules.
Last week European derivatives traders were given formal permission to use crucial UK market infrastructure in a no-deal Brexit, as regulators enact contingency plans to contain market turmoil from Britain’s departure from the EU.
