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ESMA: Hard Brexit would pose 'significant stability risks'

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Europe’s top financial regulator has requested Brexit-related contingency plans from regulated companies based in London and other supervised entities.

In a speech to the European Parliament’s Economic and Monetary Affairs Committee, Steven Maijoor – chair of the European Securities and Markets Authority (ESMA) – said the regulator was “looking closely” at the potential effects on the financial sector if the UK leaves the EU in 2019 without a trade agreement.

“Obviously, Brexit may pose significant financial stability risks, in particular in the event that the UK would leave without any arrangements in place,” he said. “ESMA has been looking closely at the areas where a cliff-edge effect could mean higher risks for investors and markets as a whole, and, together with other relevant authorities, is working on possible mitigating actions.

“In addition, as a direct supervisor of credit rating agencies and trade repositories within the EU, with a number of entities headquartered in London, ESMA requests appropriate contingency plans from individual supervised entities.”

The regulator will monitor and communicate with affected parties “to reduce as much as possible the risk of disruptions under any scenario”, Maijoor added.

As Brexit negotiations between the UK and the rest of the EU have stuttered, speculation has grown as to the effects of a so-called ‘hard Brexit’.

A survey of derivatives traders by BMO Global Asset Management earlier this year found there was a “meaningful” risk that the negotiations could end with no deal.

The average view on the probability of a “no deal” outcome was around 40%, BMO reported, although views were spread across a range of 5%-100%, emphasising the uncertainty of the outcome.

In his speech, Maijoor also hinted at expanded powers for ESMA to oversee “third country” entities – a crucial aspect of post-Brexit regulation.

The regulator has begun a review of how it would work with credit rating agencies based outside of the EU. However, Maijoor said it was clear that “some significant legislative changes need to be considered soon”.

The European Commission has proposed granting ESMA regulatory powers over clearing houses (also known as central counterparties (CCPs)) based outside of the EU. After March 2019, this would include London-based entities.

A review of European regulators has also proposed making ESMA the regulator of “certain key third-country benchmarks and prospectuses”, Maijoor added.

“In the same vein, assigning supervisory powers for ESMA towards non-EU trading venues could be considered, as suggested in ESMA’s consultation response from earlier this year,” he said. “I believe that such a step to centralise the third-country supervision would bring a number of benefits for the Union as a whole.”

Maijoor’s speech also touched on the impending MiFID II regulations. He warned that providers “should not underestimate the size and complexity of this project, and thus the risk of potential glitches in the initial operational period”.

“ESMA does acknowledge the multiple challenges for everyone involved, and will address all issues with available tools as the implementation progresses,” he said.

He emphasised that ESMA was also expecting to be stretched as the regulation came into force, requiring “some prioritisation” of different tasks.

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