SEC chief urges action to prevent no-deal Brexit causing mayhem

Jay Clayton, the head of the US Securities and Exchange Commission, has called on the UK and EU to take action to ensure a no-deal Brexit would not cause havoc to global markets.

The SEC chair said he would like to see firm commitments to ensure that key market functions can continue without disruption even if the UK crashed out of the EU without securing a withdrawal agreement.

Mr Clayton pointed to non-centrally cleared derivatives contracts and investment management broadly as areas of concern.

Impact

“Some period of adjustment would be good,” he said . “The intricacies of our financial system are significant and it’s difficult to identify all the ways in which a decree that something is no longer valid may impact.”

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The comments by Mr Clayton are the latest in a series of warnings issued by US regulators as the March 29th, 2019 date for the UK’s exit from the EU draws closer.

More than two years after the Brexit referendum, British politics remains fractured, with parliament unable to agree on the terms of an orderly withdrawal. Theresa May, UK prime minister, has been forced to delay a vote on her exit deal until January.

In separate speeches earlier this month, Mr Clayton and Christopher Giancarlo, the outgoing chairman of the Commodity Futures Trading Commission, which regulates derivatives contracts, issued warnings on the same day about the potential impact of Brexit.

The Federal Reserve warned in November that a no-deal Brexit posed near-term risks to the US financial system.

Mr Clayton said he intended to boost the number of SEC staff working solely on Brexit-related issues and said his concerns about the UK crashing out of the EU had risen since the start of the year.

“If you asked me that nine months ago, I would have said, boy it would surprise me. If you’re asking me today. . . let me put it this way, I think it’s prudent for me to spend time thinking about what that means,” he said.

Preparations

The UK and EU, as well as businesses, have stepped up preparations for a no-deal Brexit in recent months as British politics has been torn apart by the question of whether to approve Mrs May’s exit deal.

The European Commission recently committed to allowing European companies temporary access to UK clearing houses, which dominate the global derivatives market, in the event of no-deal. Brussels has also agreed a two-year access period for central securities depositories.

The European Securities and Markets Authority, the Paris-based regulator, has also taken steps to prevent disruption to the market for non-cleared derivatives, including removing regulatory hurdles to contracts being shifted into the EU.

Banks and other financial institutions have moved parts of their business from London to mainland Europe and Ireland to ensure that they retain access to the European market after the UK leaves the EU.

Mr Clayton said he welcomed the efforts to address the risks around derivatives that trade through central clearing houses but was worried there was limited capacity to identify and address other potential issues.

“A question I have is what’s happening in the bilateral instruments that are not centrally cleared and how do we have those continuing relationships across borders,” he said.

A key Brexit question, still unresolved, is what will happen to complex financial contracts that in some way reference or rely on the UK’s continued membership of the EU. In Brussels, officials have said there is little generalised risk due to preventive steps by private institutions.

Consequences

However, Mr Clayton highlighted the potential for adverse consequences as parties take steps to ensure the continuity of contracts. “You may have parties who are acting in ways that are in their own interest but collectively turn out not to be in the interest of well-functioning markets,” he said.

He did not point to any specific issue, saying: “You’re not going to see this behaviour to any great extent until the issue is in front of you”.

The SEC chair also reiterated his previous calls for companies to provide more disclosure on how they are preparing for Brexit and the impact on their business.

“For some companies this is obviously going to be a significant event, and I’d like to see them starting to disclose how they intend to handle it,” he said. – Copyright The Financial Times Limited 2018