BREXIT Bedevils Plan to Unify EU Capital Markets


Monday, June 27, 2016 1.27PM / By Ryan Tracy /Viktoria Dendrinou /Rachel Witkowski WSJ

The U.K.’s vote to leave the European Union threw a wrench into long-running efforts to build a unified European financial system, creating a new source of uncertainty about the rules governing one of the world’s largest financial-services markets.

While global markets appeared to come through the wake of the “Brexit” vote Friday without experiencing a 2008-like panic, financial regulators were left trying to sort through a host of questions.

A project aimed at unifying capital markets across Europe, for instance, has so far been spearheaded by Jonathan Hill, a Briton who has headed the financial regulatory work of Europe’s executive body as European commissioner in charge of financial services. He announced Saturday that he would resign effective July 15 in the wake of the U.K. vote. British officials also have been at the forefront of pushing for a banking union, with common standards for keeping banks safe and unwinding them in the event they collapse.

Other European officials are expected to push ahead with that work, but Mr. Hill’s departure raises the possibility that the projects would lose momentum once the U.K., one of their strongest advocates, drops out of the EU.

“Brexit is clearly a setback for those initiatives,” said Heath Tarbert, a partner at law firm Allen & Overy LLP.

Meanwhile, financial firms with large operations in the U.K. were left wondering how they would be regulated. U.K. supporters of leaving Europe had argued, in part, that a departure from the EU would allow them to throw off European-led regulatory initiatives.

But it isn’t clear what that means for financial services. On Friday, Bank of England Gov. Mark Carney pointed to the capital and liquidity standards the country has put in place as evidence that financial markets could handle any coming turbulence, suggesting that at least some British policy makers won’t sanction a regulatory rollback.

In some cases, financial-services laws are applied directly from Brussels and would fall away if the U.K. leaves, meaning substitute laws would have to be rewritten to avoid legal vacuums. Other rules, which have already been turned into U.K. legislation, may need to be amended because they often depend on EU regulatory agencies, such as banking or securities watchdogs.

As the U.K. negotiates its European exit, it will have to deploy an army of lawyers to go through the EU’s financial rule book line by line and decide what to keep and what to drop, likely to be a painstaking process.

Even in terms of practical tasks, the U.K. has work to do as the London-based European Banking Authority, the EU’s banking watchdog, will most likely have to move its headquarters to continental Europe.

Many firms use the U.K. as their gateway to the rest of Europe, including banks, fund managers, payments companies and clearinghouses dealing with euro-denominated trades. The key issue is what would happen to firms’ “passports,” the instruments by which insurers, banks, fund managers and other financial firms in one EU country are authorized to conduct business across the bloc.

“In two years’ time when the U.K. exits, then the question is what to do if we have to get licensing in another country like Germany,” said Carsten Hils, global head of the payments division for INTL FCStone Ltd., a financial-services firm. “It increases your regulatory cost.”

A key area where this might be an issue entails clearinghouses, which stand between buyers and sellers of financial instruments. They are supposed to help prevent a marketwide collapse by ensuring that either party in a derivatives transaction would get paid if the other side falters.

London is home to some of the region’s biggest clearinghouses, including ICE Clear Europe, a unit of Intercontinental Exchange Inc.; CMEClearing Europe, a unit of CME Group Inc.; and the London Metal Exchange. The city dominates the field of euro-denominated interest-rate derivatives trades.

“It is not possible to fully evaluate the longer-term impacts until the terms of the U.K.’s future relationship with the EU are known,” a spokeswoman for CME said.

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