The International Swaps and Derivatives Association (ISDA) has urged policy makers to implement a transitional period should clearing be relocated once the UK exits the European Union.
In a recently published whitepaper, ISDA expressed concerns around the complexity and considerably increased costs to market participants following central counterparty (CCP) relocation.
“The vast majority of EU clearing currently takes place in London, but there are suggestions that EU regulators might introduce a location policy for euro-denominated swaps to be cleared in the EU,” the paper said.
Costs to trade euro-denominated interest rate swaps are widely expected to increase significantly for asset managers if euro clearing is forced to move from London to the EU.
The vast majority of business for euro derivatives comes from outside of the EU, and forcibly moving it away from clearing houses such as LCH would mean dramatic cost increases.
In a letter to the European Commission’s Valdis Dombrovskis in June, ISDA said the location policy would see price volatility, higher execution costs and increased systemic risk due to smaller and weaker CCPs.
The group added there is a need to secure legal certainty for derivatives trading between UK and EU counterparties after March 2019.
UK and EU policy-makers should remove any legal uncertainty over cross-border English law contracts through transitional arrangements until a proper system of mutual recognition is introduced.
“It is important that any final Brexit deal creates a smooth transition for market participants and the wider economy, and allows for the maintenance of robust risk-management standards and legal certainty,” the whitepaper concluded.