LONDON (Reuters) - Credit rating agencies and trade repositories licensed in the European Union must show by the end of this year they could cope with Britain crashing out of the bloc without a trading deal, the EU’s markets watchdog said on Thursday.
The European Securities and Markets Authority (ESMA), which authorises all ratings agencies and trade repositories in the bloc, said its work on Brexit would be key this year.
Both credit ratings agencies (CRAs) and trade repositories (TRs) are crucial to the smooth functioning of financial markets, and with many of them based in London their response to Brexit could have a big impact on British jobs.
“By the end of the year, all supervised entities should be ready if the UK leaves the EU under a cliff-edge scenario,” ESMA said in a statement.
The “Big Three” CRAs, Moody’s, Standard & Poor’s and Fitch, all have their European base in London. Though they also all have offices in countries such as France, Spain and Germany, their response to Brexit could affect how many senior jobs remain in London.
S&P has a market share of 46 percent in the EU, followed by Moody’s on just over 31 percent and Fitch on around 15 percent, according ESMA’s latest data.
The use of TRs by banks, brokers and asset managers to record their derivatives transactions is mandatory. Five of the eight TRs authorised by ESMA are based in Britain.
ESMA said it had already received contingency plans from CRAs and TRs for a range of Brexit scenarios, including where there is no transition deal, and where there is a “hard” Brexit with no trading agreement.
“It appears that a majority of the relevant supervised entities intend to continue to provide services in the EU following Brexit,” ESMA said.
“ESMA has made it clear to the supervised entities that the post-Brexit structure of TRs and CRAs must be as strong as the pre-Brexit structure.”
To stay compliant with EU rules for providing ratings of countries and companies as well as more complex securities that played a role in the financial crisis, CRAs would have to ensure many staff doing those jobs were in the EU.
These conditions echo those being imposed on banks, insurers and asset managers in Britain, which are seeking licences for new hubs in the bloc ahead of Brexit.
ESMA said it would also monitor the impact of Brexit on foreign clearing houses that offer their services to customers in the bloc.
London-based LCH (LSE.L) is the largest clearing house for euro-denominated assets, and the EU has already proposed tougher scrutiny of such “systemic” foreign clearers as a condition for allowing them to continue serving EU customers.
Reporting by Huw Jones and Marc Jones; Editing by Carolyn Cohn and Mark Potter