That alarm bell is intended not just for the U.K. government, but also to European Union negotiators.
The BOE highlighted two obvious financial contract risks from Brexit. The first concerns the need for U.K. and EU legislation to ensure effective cover will stay in place for holders of 40 billion pounds ($53.2 billion) of insurance.
Secondly, the 26 trillion pounds of outstanding derivatives contracts cleared through London would become vulnerable were U.K. banks to lose their passporting rights. An abrupt end to the free movement of capital could create knock-on effects for servicing existing contracts, such as transfer of margin, that could be nothing short of disastrous.
Dominant Force London has 97% of the clearing for euro-denominated OTC interest-rate derivatives
London has 97% of the clearing for euro-denominated OTC interest-rate derivatives
To guard against these risks, particularly given the prospect of a no-deal tumble out of the EU in March 2019, Carney has called for a 24-month transition period.
He's returning fire in a battle that will have big consequences for Britain. Earlier this summer, the European Central Bank lobbied harder to shift clearing of euro-denominated securities into the euro area. There is no doubting it is a highly-coveted prize that various European capitals would love to win. Deutsche Boerse recently made another bid to secure a leading role.
But with the year almost over, the EU has achieved little or no progress creating the infrastructure it needs to enable a switch away from London. A further sticking point seems to be that EU Commission plans to give the European Securities and Markets Authority more authority over clearing-houses has hit resistance. Several governments fear a reduction of powers for their national regulators, according to the Financial Times. In this crucial area, the EU-27 are not acting as one.
He made the point being separating euro-denominated contracts from other currencies would raise costs for all. He even quantified the cost -- 22 billion euros ($26 billion) annually for every basis point up tick in interest costs. And that increase would get passed on to European households and businesses.
EU politicians, as well as the U.K. government, need to get real on mutually assured destruction. Resolving a credible plan to share oversight is a step that can be made now. For the EU, building its own clearing infrastructure that is fit for purpose post-Brexit can then be achieved without upending a vital functioning marketplace. Without it, the risks of Brexit contagion will become reality.
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