The process by which the U.K. will leave the European Union, known as Article 50, is on course to be triggered by the end of March, following a vote in favor of the Article 50 Bill by the British members of Parliament on Feb. 8, endorsed by the House of Lords later in the month after thorough debate. The passage of the bill through the House of Commons means that Prime Minister Theresa May is still on schedule to trigger Article 50 by the end of March.
Debate continues about the impact of Brexit on Europe’s financial markets and what measures the U.K. will take to ensure it maintains its position as a key financial center. European Commission Vice President Valdis Dombrovskis said in a speech that the City of London will continue to be a “substantial financial center” post-Brexit, adding that “equivalence is certainly one of the options we are looking at… another is, of course, for industry to establish a substantial enough presence in the EU to maintain EU passporting [rights]”.
With regard to euro-denominated clearing in the U.K., he cited a number of factors to consider. “One is financial stability. There are questions related to the enforceability of swap lines between the [European Central Bank] and the Bank of England if the U.K. is to move out of the jurisdiction of the European Court of Justice.”
Meanwhile, the European Parliament’s lead Brexit negotiator has stated that it would not be possible to negotiate an EU-U.K. trade agreement in parallel with a withdrawal agreement and that negotiations over any transitional arrangements would start after an agreement is reached on the sum of the U.K.’s outstanding commitments. A leaked draft of a European Parliament report on the impact of Brexit states that Article 50 does not allow for transitional arrangements to be included in the withdrawal agreement.
FIA put forward the industry’s concern in its response to a Parliament’s Treasury Select Committee consultation regarding transitional arrangements in relation to Brexit. FIA’s letter notes that “significant market disruption, financial instability and regulatory uncertainty may result from a failure by the U.K. and the EU to deliver a smooth transition through the Brexit process," and urged policymakers to agree on transition terms in the first few weeks of negotiation following the trigger of Article 50.
FIA detailed the following key priorities:
■ “Equivalence” for the U.K. and its market infrastructure. FIA urged policymakers to complete the process prior to the end of the two-year Article 50 process, failing which employ a grandfathering regime.
■ Transitional arrangements. In order to avoid a “cliff-edge” and to give the global industry sufficient time to transition into the new regulatory paradigm, transition arrangements are necessary.
■ Confirmation within the first few weeks of negotiation that transitional arrangements will be part of the deal. The end of 2017 will be too late, as firms will already be executing their contingency plans, based on worst-case scenario planning.