The finance lobbying group warned that without time to sort out regulation and operation issues, widespread financial instability could ensue.
Simon Lewis, chief executive of Afme, said: “Banks are conducting extensive planning and putting in place arrangements to minimise disruption to their businesses and clients. However, additional time is required to adapt to the post-Brexit framework and to minimise disruption for end users of financial services, including ensuring the continuity of existing contracts.”
March 2019 Time Bomb
Based on existing arrangements and with no transitional period, Afme sees chaos for the day after Brexit.
Clearing houses would one day be European-regulated and the next, in breach of EU regulation and facing “punitive capital increases”. This would be true for all partners of any cross-border trade between the UK and EU, including those involving pension funds and insurance.
There are $600tr notional of derivative contracts outstanding and almost half of that appears to be traded in the UK, according to the Bank of International Settlements. The trades that are cleared or held by UK counterparties would not have any recognition by the EU after Brexit.
EU corporates end up facing counterparties in a different regulatory world.
The UK would be thrust out of the “safe data zone” across the EU and financial institutions wouldn’t be able to move data between the EU and the UK without violating data protection rules.
Afme’s transition
For Afme, a transition period would have to work this way. Existing legislation, regulation, permissions and authorisations would need to continue as before.
The length of the time for the transition would last for as long it took to negotiate trade arrangements and create any bilateral agreements.
During this time, the United Kingdom would be able to apply for "third country status" to become an approved business partner with EU27 countries.
Financial services could work out what to do with all of their cross-border financial projects including derivatives contracts, clearing, cross-border loans cash management and deposit taking.
Banks could apply and receive any local licences they needed to do business — and make sure their organisational structure, physical location and client relationships all comply with local authorisations.