Brexit, clearing and post-Libor problems

UK pension funds may have to clear, post-Brexit

Delays to Emir review raise fears UK schemes may lose exemption

Clearing houses urge CFTC to act on non-default losses

US clearing members divided on whether NDLs are CCPs’ responsibility or a mutual risk

Libor fallbacks set to split cash and swaps

Basis could appear when benchmark dies, with swaps, bonds and loans embracing different fallbacks

COMMENTARY: Frictional losses

Last week, Risk reported that two major banks – UBS and Barclays – were beginning to shift their swaps businesses out of London in preparation for a no-deal Brexit. This week, Risk digs a little deeper into what this move might mean – as well as the problems surrounding other aspects of the ongoing Brexit conundrum.

Splitting banks’ UK and EU operations was never going to be simple, but it is now clear that it will mean significant capital costs as well as logistical challenges. Banks will no longer be able to pool their capital in a single EU location to meet the various regulatory minima; they will need to hold capital on both sides of the Channel, and the total may well be higher than current capital requirements.

More uncertainty and inefficiency comes from other areas – with news that UK pension funds may have to clear derivatives transactions with EU counterparties (and vice versa) once the UK leaves the EU, forcing them to hold large amounts of low-yielding cash to use as collateral.

There are also worries that the EU’s proposed Brexit relief, intended to keep vital processes such as clearing and novation operating in the short term, may not be up to the job.

With less than four months remaining to the March 29 Brexit deadline, there is still no sign of a deal that can satisfy the EU side, the UK parliament, and the various factions in the UK’s ruling Conservative Party. Anything from a costly no-deal exit to a decision to remain still seem possible.

STAT OF THE WEEK

Cross-jurisdictional activity category accounted for 30.8% of major EU banks’ total systemic risk scores – by contrast, it represented just 12.6% of the risk scores of their US counterparts

QUOTE OF THE WEEK

“There seems to be an underlying message with the move to the standardised approach and demise of the operational risk working group that operational risk is less important. Is this really the message the Basel Committee wants to send?” – Risk executive at a large European bank