​CFTC’s Giancarlo sounds alarm on potential Brexit impact on US, global stability

8 August 2018 3:20pm

30 July 2018.  By Neil Roland.

J. Christopher Giancarlo, head of the US Commodity Futures Trading Commission, warned that a disorderly Brexit could harm US and international financial stability by throwing existing cross-border derivative contracts into doubt.

“I’m concerned Brexit could have a systemic risk impact on the world economy if there’s not a clear resolution of it,” he told the House Agriculture Committee last week. “It’s important for American officials to stay out. But we do have our own markets to be concerned about.”

Giancarlo cited a recent Bank of England report in contending that derivative contracts between UK and EU firms could be “void or voidable” soon after the UK's exit from the EU occur next March. Many of those contracts expose firms to US dollar and interest rate changes, he said.

The CFTC chairman also questioned whether UK clearinghouses could continue to service European bloc banks after Brexit without explicit EU assurances.

“I don’t want to be alarmist,” Giancarlo said. “But each month that goes by, my temperature level goes up a little bit more hoping to see resolution and clarity around these issues.”

He said he is trying “in a very calm and measured voice” to tell European colleagues of his concerns. “It seems like a lot of brinksmanship,” Giancarlo said.

— Bank of England report —

A Bank of England financial stability report issued last month said UK and European bloc firms may not have regulatory permissions to amend or otherwise service uncleared contracts with firms in the other jurisdiction.

This uncertainty could affect about a quarter of contracts agreed to by firms in the two jurisdictions — worth about 29 trillion pounds ($38 trillion) in notional value, the report said.

In addition, UK clearinghouses including London Stock Exchange’s LCH wouldn’t be able to serve European bloc firms after exit unless they get EU recognition, the report said.

UK clearinghouses clear about 90 percent of euro-denominated interest rate swaps used by European bloc customers, according to the European Central Bank.

Derivative contracts that could be affected by this clearinghouse uncertainty could amount to 67 trillion pounds in notional value, or $88 trillion, the Bank of England report said.

Earlier this month, Bank of England Governor Mark Carney voiced concern about the EU’s lack of a solution so far to the threat of post-Brexit discontinuity of derivative contracts.

“On the day of leaving, the contract can still be serviced. However, lifecycle events will start to accumulate and arguably they will accumulate quite rapidly in the event of a cliff-edge Brexit because one would reasonably expect the volatility in markets would go up,” Carney told UK lawmakers.

Fintech Regulation in 2018