EU backs short-term access to UK clearing houses in no-deal Brexit

The European Union has reassured the financial services sector that firms will still be able to access derivatives clearing houses in London in the event of a no-deal Brexit.

The Bank of England warned earlier in October that the financial services sector could face costly disruption if the UK quit the EU without a deal, with the derivatives market most at risk.

Derivative contracts are financial instruments drawn up by two or more parties to hedge risk. They are handled by ‘middlemen’ known as by central counterparty clearing houses, and the City is an important hub.

EU members currently have around £69trn of contracts with UK clearing houses but so far, Brussels and London have failed to reach agreement on how the market will operate post Brexit. There are fears of a possible dramatic hike in trading costs or firms being unable to adequately hedge risk if a deal is not struck in time.

But European Commission vice president Valdis Dombrovskis, who is responsible for financial regulation, has confirmed that EU firms will temporarily be able to use British clearing services in the UK in the event of a no-deal Brexit.

He told the Financial Times that the relief would be short term and would be linked to the UK’s willingness to remain close to EU regulatory and supervisory standards.

“Should we need to act, we would only do so to the extent necessary to address financial stability risks arising from an exit without a deal, under strict conditionality and with limited duration,” he told the newspaper.

Current regulations ban European companies form using non-EU clearing houses unless they are specifically recognised by Brussels.