The Bank of England said an agreement is needed as part of theBrexit process to protect the “long-term validity” of 20 trillionpounds ($27.1 trillion) of existing derivative contracts.

The BOE's Financial Policy Committee said on Monday that afterthe U.K.'s withdrawal from the European Union, it will be “complexand difficult” for financial firms themselves to tackle the risksto continued servicing of contracts between counterparties in theU.K. and the remaining 27 EU countries.

“Impairment to the servicing of these contracts could disruptmarket functioning and make it more expensive for firms andhouseholds to insure against risks,” the BOE said in astatement.

Tens of thousands of counterparties — about a quarter of bothU.K. and EU client uncleared derivative contracts — could beaffected, the BOE said in a statement. The continuity of insurancecontracts and the free flow of personal data could also beaffected, the central bank said.

Firms may lose the permissions they need to carry out “regular'life cycle' events” in derivatives contracts, such as tradecompression, the BOE said.

“The two-way nature of derivatives means both U.K. and EU firmsdoing cross-border business may require appropriate permissions,”the BOE said. “A comprehensive solution is therefore likely torequire the development and passage of legislation in bothjurisdictions in order to protect the long-term validity ofexisting contracts.”

Scott O'Malia, head of the International Swaps and DerivativesAssociation, said, “It's important that provisions are put in placethat allow U.K. and EU counterparties to perform on their existingcontractual obligations.”

Accounting Rules

The BOE also said the introduction of new internationalaccounting standards known as IFRS 9 will “support financialstability,” and will not alter the necessary level ofloss-absorbing capacity for the banking system.

The FPC will take steps to ensure that the interaction of IFRS9, which will apply to most banks in the U.K. as of Jan. 1, withthe 2017 stress test “does not result in a de facto increase incapital requirements.”

“The FPC and Prudential Regulation Committee encourage firms touse any internationally agreed transitional arrangements as theyadjust to the new regime, provided the arrangements are broadlysimilar to those currently being considered,” the BOE said.

The FPC confirmed its recommendation to the PrudentialRegulation Authority to set the minimum leverage-ratio requirementfor banks at 3.25 percent, with central bank reserves removed fromthe leverage exposure measure.

From: Bloomberg News

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