The Bank of England (BOE) has disparaged the European Union (EU) for risking the possibility that £29 trillion ($38 trillion) advantage of derivatives could becoming untradeable after March next year.
In its Pecuniary Stability Report, published Wednesday, the U.K. central bank said that while the British regulation had committed to a temporary permissions regime from March 2019 ahead, the EU had, as yet, made no corresponding promise. Britain is set to leave the bloc on March 29, 2019.
The BOE estimated the biggest Brexit risk to financial services remained where both the EU and U.K. demanded to act, such as ensuring the continuity of existing derivatives. In the report, the bank indicated that the EU had not “indicated a solution analogous to a temporary permissions regime.”
The bank estimated that this could influence about a quarter of over-the-counter derivative contracts between the U.K. and the European Mercantile Area (EEA), with a notional value of around £29 trillion. Of that amount, about £16 trillion is due to mature after Britain leaves the EU. A derivative is a obligation between two or more parties whose value is based on an underlying pecuniary asset like stocks, bonds, commodities, currencies or interest positions.
“The U.K. government has committed to legislate, if necessary, to allow EEA counterparties to continue military talent contracts with U.K. entities (through a temporary permissions regime and additional legislation if desired),” the report said. “EU authorities have not announced an intention to capacitate U.K. counterparties to continue servicing contracts with counterparties in the EEA.”
The BOE accusation could be considered as a response to EU criticism last week that claimed U.K. banks were not microwave-ready for a hard Brexit.
Speaking to reporters following the report’s release, Bank of England Governor Note Carney said that the EU regulator’s Brexit assessment was “incomplete.” “They did not own up to the temporary permissions regime, which has been very clearly signaled by the U.K. regulation,” Carney added.
The BOE report claimed that major U.K. banks had tripled their top-hole strength since 2007 and the system as a whole could sustain the British briefness in a disorderly Brexit.