ESMA studies post-Brexit risks

The European Union’s (EU) securities regulator wants credit rating agencies (CRAs) and bodies that record derivatives trades to show how they would avoid disrupting markets when the UK ceases to be a member.

The European Securities and Markets Authority (ESMA) directly regulates up to 30 CRAs, including Moody’s and Standard & Poor’s (S&P) in the EU, as well as six trade repositories (TRs) which track derivatives transactions. Several rating agencies and repositories are based in London and serve customers across the region, raising questions about continuity of service assuming the UK leaves the EU in 2019.

ESMA reports in its annual supervision plan that a further priority this year is to increase oversight of so-called third-country central counterparties that pose a risk to financial stability in Europe. Ahead of the Brexit negotiations, a debate has already begun over whether the clearing of euro denominated assets and derivatives should take place in London once the UK departs.

Several EU officials and the European Central Bank (ECB) support moving clearing activities to an alternative financial centre such as Frankfurt or Paris in a bid to have direct supervisory powers over CCPs, which have assumed a more important role since the 2008-09 financial crisis and deal with large amounts of euro denominated derivatives

The Paris-based regulator added that its work will include an assessment of the “potential implications” of Brexit on its remit of enhancing investor protection and promoting stable and orderly financial markets. “ESMA has also started engaging with CRAs and TRs that may be affected by the outcome of the referendum to understand the preparations these entities are making,” it reported.

“Looking forward to 2017, strategy and governance will be a key theme for both credit rating agencies and trade repositories, particularly in light of the UK exiting the EU,” said Steven Maijoor, ESMA’s chairman. “Our work on central counterparties will focus on recognition requests and a risk analysis framework for existing recognised entities.”

Other items published by ESMA this month include an updated Q&A document on the implementation of the Market in Financial Instruments Directive (MiFID II) and Regulation (MiFIR).


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