London's trade warehouses face Brexit disruption

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Europe has six authorised trade repositories, which were created after the crisis to store swaps data so that regulators can better monitor risks in derivatives markets. Four of these are located in the UK and run by the London Stock Exchange, CME Group, the Depository Trust and Clearing Corporation and Intercontinental Exchange, respectively.

These repositories are directly supervised by the Paris-based watchdog the European Securities and Markets Authority. This gives Esma certain powers, including an ability to fine the facilities – something it did for the first time earlier this year.

It is this direct supervision at a European level that would make it difficult for repositories to operate from the UK, particularly for euro-denominated trades, once the country negotiates its exit from the EU, lawyers and practitioners have said.

While some UK repositories do have a presence in the eurozone, the bulk of their staff are in London.

One person familiar with the approval process for trade repositories said it was “indeed the case that as it stands trade repositories would have to be domiciled in one of the EU countries which is a strict requirement from Esma”.

They added that most operators would likely incorporate a European function in the EU to service European clients after Brexit occurs, but also would want to have a UK authorised entity to service UK clients.

James Doyle, a partner at Hogan Lovells, said: “One would expect European regulators to be able to have direct access to repositories and risk mitigation infrastructure, logically. It is exactly akin to the clearing argument, where it would be unusual to have a currency cleared outside the borders of that currency zone.”

However, he said it would ultimately depend on the terms of the UK’s negotiation with the EU governing its exit.

In any case, the impact in terms of jobs would likely be small. The most recent accounts filed by DTCC, LSE, CME and ICE – for 2014 – show that most had staff numbers in the single digits.

But it is another example, like the relocation of the European Banking Authority from London, of how jobs could could leach from London as a result of Brexit.

Andrew Douglas, EU head of government relations at the DTCC, said it would “continue its ongoing work to identify how a UK exit from the EU will affect all of our businesses and clients while outlining potential actions we may need to take in the future”.

The LSE, ICE and CME declined to comment.

The issue reflects a broader question over the application of the European Market Infrastructure Regulation in the UK once it agrees the terms of its exit. Emir is the EU’s response to commitments made by the G20 countries in 2009 to reduce risks in derivatives markets after the financial crisis. It introduces new reporting requirements alongside central clearing and a greater use of electronic trading, and hands more power to EU authorities. Esma directly oversees trade repositories, and is also part of the college of regulators system which oversees each European clearing house.

Even if the UK decided to remain part of the European Economic Area, under which it would adopt most EU laws in return for full access to the single market, Emir would not apply. In a note sent to clients on June 25, law firm Shearman and Sterling said: “To date, there are several significant pieces of EU legislation which have not been incorporated into the EEA in the area of financial services, for example, Emir.”

The reason is that Emir hands supervisory powers to Esma, in which EEA states have no representation. There are plans to extend Emir to EEA countries, but Shearman and Sterling said that if even if Emir was incorporated into the EEA, then clearing houses might be entitled to operate in the EU, but added “the position is less clear for a UK trade repository” due to their direct supervision by Esma.

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