LONDON (Reuters) - British and European Union watchdogs could sign a pact to avoid Brexit disrupting trillions of pounds in cross-border financial contracts and undermine market stability, a top UK regulator said on Monday.
Britain and the EU are negotiating the detail of a transition agreement to bridge the UK’s departure from the bloc in March next year and start of new trading relations.
Andrew Bailey, chief executive of the Financial Conduct Authority, said a “well-defined” agreement was needed by the end of March so that regulators could put in place “practical solutions” for banks and insurers in time.
Some 12 trillion pounds of derivatives contracts extend beyond March 2019, and at least 30 million EU and 6 million UK insurance policies, meaning there are questions about whether they would actually pay out.
Existing holdings of derivatives belonging to EU firms at clearing houses in London face being closed out abruptly if there is no pact between regulators to ensure their legal continuity after Brexit, Bailey said.
A pact would also allow British and EU firms to continue swapping data without risk of breaching UK and EU laws.
Regulators in Britain could sign a memorandum of understanding (MOU) with counterparts in the European Union to give practical effect to a stable and orderly transition, Bailey said.
This would mean the FCA signing an MOU with counterparts in other financial centres, like BaFin in Germany or AMF in France, and the Bank of England and the European Central Bank working together.
“An MOU would be a means for the regulators to be transparent in the more practical issues around implementation, and thus that we are committed to such a period of time being available,” Bailey said in a speech at a “Future of the City” dinner.
“It can be done, and I think there is a growing consensus on both sides that it must be done,” Bailey said.
“I sense this view increasingly taking hold from my discussions around Europe.”
Leaving it to banks and insurers to “repaper” or amend terms of thousands of contracts would take too long and be messy, Bailey said.
Turning to future trading relations, Bailey reiterated his plea for the EU to keep its markets open to the City of London’s finance industry by agreeing with Britain to mutual recognition or accepting the broad thrust of each other’s rules.
Such a deal is the City of London’s “Plan A”, but EU officials have said it will not fly because it would give Britain benefits in financial services that only membership of the EU should bring.
Bailey said the EU proposed such an arrangement to the United States - though the U.S. rejected it - and the bloc is considering a mutual access deal in fisheries with Britain after Brexit.
Reporting by Huw Jones. Editing by Jane Merriman