Speaking at the House of Lords’ EU Financial Affairs Sub-Committee, Woods flagged three issues that UK regulators had worked on to prepare for a no-deal Brexit that could occur when the transition period for the UK’s exit from the EU ends.
These were central counterparties, uncleared derivatives positions, and data.
The issue of central counterparty clearing of euro derivatives has been a source of conflict since the UK’s 2016 Brexit vote. The EU has made it clear that it will bring legislation to make this part of the clearing industry relocate to the continent. That legal framework would set the ground for European regulators to demand that euro swaps clearing, which is dominated by London-based LCH, be moved out of the UK.
But in the near term, the threat to financial stability posed by a sudden break between the two jurisdictions has led regulators on both sides of the Channel to pursue equivalence.
Last November, European Commission vice president Valdis Dombrovskis said he will renew the current temporary equivalence agreement beyond March, which is when it is due to expire.
“Regrettably, the risk to financial stability has not yet been fully removed, because industry has not so far fully prepared,” he said at the time.
Woods said that this was the most important of the three issues, covering £57tr ($74.39tr) notional of EU-UK derivatives positions, but that he was “cautiously optimistic” that the EU would deal with this risk as it had before.
He later added that while all three issues could rebound on the EU as much as the UK if not resolved, “that is particularly true for the central counterparty issue, because if you sheared off that bit of financial plumbing it could cause really quite a dramatic effect that would affect all of us”.
Addressing uncleared derivatives positions between UK and EU companies, Woods noted that counterparties had undergone a “huge repapering” effort into new entities “at a reasonably high pace”, with EU 27 clients of UK companies repapering 80%-90% of their positions, by revenue.
But he warned there is still a lot of work to do in the onboarding process, with companies needing to connect IT systems and conduct test trades on those systems. He added that there was also “little sign of back books novating”.
Woods also said that leaving uncleared mechanics unresolved would create a risk for the EU. But he added this was more complicated than cleared positions, as running the risk could pay off for the EU by eventually pulling business to the continent.
On data, Woods said that while the UK had legislated to send data to the EU, the latter had not yet reciprocated. But he added that a commitment in the Brexit political declaration should lead to a finding of adequacy under the EU’s GDPR rules.
