Regulation Matters – July 2017

As Brexit begins, everyone’s optimistic or determined.  But who’s focused on financial stability?

Our July edition heralds the start of Brexit negotiations – but questions just how far up the agenda financial stability is likely to feature.

If you’d like to know more, you can catch up with our previous editions, or sign up to receive regular updates, call us on 020 7842 4800, contact us – or send in your comments using the form below.

Brexit: a constructive state of mind

Soliloquies have at last become dialogues, with the first official stage of Article 50 negotiations between the EU and the UK starting on 19 June, almost a year to the date after the Brexit referendum.

In a European Commission press conference, EU Brexit chief Michel Barnier set out the terms of reference for the negotiations. Displaying his constructive, non-hostile attitude, Barnier referenced French politician and founding father of the EU, Jean Monnet:

“When asked whether he was optimistic or pessimistic, he answered: neither one nor the other, I am determined. That is my state of mind”.

Reciprocating Barnier’s sentiment, the UK equivalent David Davis offered up a Winston Churchill quote in the form of:

“The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty. And so bridging between Churchill and Monnet, I am certainly a determined optimist”.

Great – so superficially it’s all optimistic and determined.

Talks will be held for one week each month, with negotiations broken down into three issues and the time in between used to work on proposals and exchanges about them.

But scratch the surface and three issues of contention become clear:

  1. Citizens’ rights: Barnier has already called for more ambition, clarity and guarantees, following PM May’s ‘Settled Status Special Register statement
  2. The single financial settlement: what’s the damage?  Figures for the Brexit divorce bill have ranged from ‘not a penny more’ to €100bn. David Davis says that there was nothing in the treaties that obliges the UK to “pay a penny” after it leaves. This view was backed up by the House of Lords EU financial affairs sub-committee which stated “Even though we consider that the UK will not be legally obliged to pay into the EU budget after Brexit, the issue will be a prominent factor in withdrawal negotiations”.  Meanwhile backbench Conservative Brexiteer John Redwood said: “What we have signed up to is to pay the club’s subscription, or contributions, for all the time we are members. Yes, we’ve got to carry on paying till the day we leave … It would be quite crazy to pay once you’ve left, because you’re clearly not getting what they think are the benefits of the club from the day you leave.”
  3. Separation issues: given everything at sake from the Good Friday Agreement to agricultural funding plans, it is all likely to be tempestuous and challenging negotiation. And financial services are seriously unlikely to be top of the agenda.

Euro-clearing: getting the balance right on financial stability

No sooner did we breathe a sigh of relief at the European Commission’s EMIR II proposals NOT amounting to a clear mandate to relocate euro-denominated clearing to the EU, than the European Central Bank (ECB) put forward a recommendation to amend a statute, giving it “clear legal competence in the area of central clearing”

This follows comments by the ECB’s executive board member Benoît Cœuré at the Global Financial Markets Association conference, in which he said the EU’s clearing regime was “never designed to cope” with major clearing houses operating from outside member states.

Extending the legal reach of the ECB is an attempt to ensure the safety and stability of the financial system when the UK is no longer a member of the EU.

On the same day – but to a different audience – Bank of England Governor Mark Carney borrowed from political historian Rohitin Mistry in calling for a fine balance between hope and despair”. In his speech to Bankers and Merchants at Mansion House, the Governor warned against fragmenting Europe’s market for clearing euro-denominated derivatives as splitting it by jurisdiction or currency would reduce the benefits of central clearing and drive up costs.

“Fragmentation is in no one’s economic interest. Nor is it necessary for financial stability”

Interesting that he should mention financial stability as funnily enough there is this thing called the Financial Stability Board (FSB), tasked with promoting international financial stability.

And, while the ECB sits on the Financial Stability Board, Carney actually chairs it – although only until this December.

Given that the European Commission has made this about ‘systemic risk’ and the enhancement of ‘financial stability’, it will be interesting to see what, if anything, the FSB has to say.

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