EU regulators seek solution to post-Brexit derivatives rule clash

European regulators are racing to avoid London branches of EU banks having to route derivatives trades through New York, if Brussels fails to deem the City’s regulatory standards robust enough after Brexit.

Officials are working on emergency tweaks to rules in the event the UK and the EU do not grant sufficient access rights to each other’s financial services markets, in a set of so-called equivalence decisions, before Britain leaves the bloc on December 31.

As the UK’s exit date nears, tensions between London and Brussels have risen over how far each side is prepared to go to maintain access. EU diplomats said that France has raised concerns in Brussels that the volume of derivatives business conducted by the London branches of EU banks risked being caught between overlapping EU and UK rules if an agreement remains elusive.

The trading of derivatives, spanning interest rates and credit is one of the biggest businesses in the City, and the current rules capture deals in the EU market with a notional value of around €50tn. Trading in swaps has emerged as a particular concern because of an EU rule, known as the “derivatives trading obligation”, that requires the most actively traded contracts to be traded on an EU trading venue, or one Brussels recognises as of an equivalent standard.

London-based branches of EU banks may be caught in the crossfire, because it is unclear whether they would be bound by EU restrictions on trading in the City. That opens them up to the risk of falling foul of overlapping and contradictory instructions from two sets of regulators.

France, which has raised the issue at meetings of EU financial services officials, has warned that without agreement on the issue, bank branches in London could be left with little choice but to execute derivative trades in the US. The EU considers venues in the US as equivalent to those in the bloc.

With such a potential outcome recognised as unintentional and undesirable, EU and UK regulators are looking for possible solutions. The European Securities and Markets Authority, a Paris-based EU agency, said that “a solution is being worked on”, declining to comment further. 

Last week, the UK Financial Conduct Authority said it remained open to discussing with Esma how to minimise any disruption created by overlapping requirements.

Financial services have remained largely beyond the scope of the broader effort by the UK and the EU to hammer out a new trade deal to govern their relationship once Britain has left the bloc. Instead, future access in financial services will depend on unilateral equivalence decisions taken by both sides.

To British frustration, Brussels has so far remained silent about whether it will grant the UK this and other market access rights. The EU commission has argued that it needs further clarity on British regulatory plans before taking any such decision.

Officials in Brussels note that it is unlikely the bloc will announce any decisions on equivalence while talks over a broader trade deal continue, given the political sensitivities. 

On the specific question of derivatives, French officials have pointed to the precedent of EU data privacy rules, which show some leniency to overseas branches, as evidence that a workaround can be found.

“Our position is unchanged and the subject is still under discussion between the competent authorities,” said AMF, the French markets regulator. The French finance ministry declined to comment.

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