​Swedish watchdog urges preparation for ‘hard’ Brexit

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Sweden’s financial regulator, Finansinspektionen (FI), has called on investors clearing derivatives through London to prepare for their counterparties to be considered unauthorised after the UK leaves the EU in March.

With less than six months to go until the UK’s departure from the union, and still no agreement on how the break would happen, it was currently uncertain what status derivatives clearing services such as LCH would have after Brexit, FI said. 

More than 90% of interest-rate derivatives denominated in Swedish kronor are currently cleared by LCH.

The regulator said: “Against this background, FI calls on companies that directly and indirectly conduct clearing at LCH to prepare for a scenario where LCH does not become an authorised central counterparty after Brexit.”

LCH becoming a third-country player in the case of a possible ‘hard’ Brexit was identified as “the single most important consequence” of the split in this context, the regulator said.

“When LCH becomes a third-country player, Swedish companies can no longer use LCH for clearing new OTC derivatives with clearing requirements,” it said.

On top of this, there was also uncertainty surrounding requirements for contracts that had already been agreed.

“An altered status for LCH can thus cause inconvenience and additional costs for the Swedish banks,” the regulator said.

FI recommended that investors assess the likely consequences for liquidity and solvency, and take capital and liquidity planning into account.

Companies should also consider whether their business models and strategies would be affected by this and what measures needed to be taken to manage potential adverse effects, FI said.

Regulators in the Netherlands and the UK have highlighted the derivatives sector as one of the most likely to be affected by Brexit.

Last year, Cardano warned that a ‘hard’ Brexit could cost pension schemes hundreds of millions of euros if it shuts them out of London’s derivatives sector.

The European Parliament’s chief Brexit spokesman Guy Verhofstadt recently warned that some UK financial products would become unavailable to EU investors after Brexit.

However, UK and EU regulators have sought to reassure investors and co-operate on agreements to keep markets open.

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  • Stockholm, Sweden

Readers' comments (1)

  • While it is not just a good idea, but also a fiduciary duty to prepare for possible risks, as the Swedish supervisor urges, it is nothing less than scaremongering to posit a hard Brexit as a fact, as the Dutch supervisor does.

    First, such negotiations are usually finished only around midnight of the deadline day, so uncertainty will remain until the very end and the present situation is no guide for the future. Second, they may not be likely, but there are scenarios in which Brexit is blown off. It is not within the remit of supervisors to foist their political opinion upon pension funds.

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