The biggest #Brexit fig you haven't heard of: £45 trillion. This is the value of a bunch of financial contracts - called derivatives. These are at risk because the EU hasn't confirmed they will be recognised after March 2019. UK has. What's a derivative contract? Well...1/thread
Like all contracts it’s a legally enforceable deal. This kind is a way for a company to manage risk. They cover lots of financial areas like bonds, mortgages and currencies. They are often also called futures contracts or swaps. 2/
Here’s a futures eg: I’m need a load of copper two years from now, but I’m worried the price will go up. I buy the option to get several tonnes of the metal in 2021. I agree with another company that I will pay a set value now, and lock it in. I can budget accordingly. 3/
Key here is a balance of risk: They’re insulated against the risk that copper prices tank, as am I if they rocket. Risk in these contracts are balanced by middle men orgs, called clearing houses, and London just so happens to be the global hub for this kind of institution. 4/
This is where Brexit becomes a major issue. What were clearing houses within the EU - eg two parties having a contract facilitated by London - will become a contract outside the EU. The terms will have changed. 5/
So, the UK Government, on advice from the Bank of England quickly moved to get legal certainty for EU institutions with derivatives contracts at London clearing houses: these will be recognised under UK law, deal or no deal. 6/
But here's the thing: The EU has not done likewise. And despite lots of reports flying about on a so-called equivalence deal (a kind of agreement the EU offers 3rd countries that says we'll recognise their financial regs) there is still no certainty for UK clearing houses. 7/
Why care? March is ages away? Well the deadline for this is mid-December according to the Bank of England. So were are a couple of melted advent calendars from crunch time. Soon, UK clearing houses will have tell EU counterparties to move their contracts elsewhere. 8/
That is (a) and expensive thing to do (b) seriously disruptive and (c) there is not necessarily enough capacity for it elsewhere. This is an area where the City of London really does dominate. Hopes that Frankfurt and Paris can meet the task are misplaced 9/
This is not a problem that the financial industry can fix on its own, there are simply too many contracts. It must be an EU Commission level decision. So-called equivalence is not enough: specific clear legal recognition of contracts is needed pronto 10/
Understand movement expected from Brussels over wkd- BUT - far more down to wire than many reports suggest. Has also shocked many senior City bods that something potentially so mutually damaging has been allowed to get to this point. Result? Important loss of trust/goodwill. ENDS
