German regulator backs Bank of England over post-Brexit derivatives

German,
British and European Union flags fly in front of the Reichstag
building in Berlin, Germany July 20, 2016.
REUTERS / Hannibal Hanschke / File
Photo

• Germany’s financial regulator BaFin has sided with the
  Bank of England and demanded that Brussels take action to
  prevent mayhem in the derivatives markets post-Brexit.
• The move shows an alignment with the BoE which has
  warned that $67 trillion of interest rate swaps and other
  derivatives could be in trouble if no political support is
  given to the banks.
• The EU Commission has so far expressed the view that
  financial regulation post-Brexit is for the banks and other
  financial companies to sort out.
• “It is almost impossible to fix that problem
  exclusively just by one side of the stakeholders involved”
  BaFin’s president, Felix Hufeld told Bloomberg, adding, there
  has to be “a solution on a political level.”

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The German financial regulatory authority, BaFin, has demanded
that EU officials in Brussels take urgent action to prevent
mayhem in the derivatives market after Brexit.

The change in German policy is a sign of support for the Bank of
England which has warned that $67 trillion of interest rate swaps
and other derivatives could flounder if a plan is not agreed on
between Europe and the UK before Brexit,
The Daily Telegraph reported.

The EU Commission has so far expressed the view that financial
regulation post-Brexit is for banks and other financial companies
to sort out, even in the event of a wider deal, despite European,
Asian and US banks arguing that they cannot do it alone, and that
the fall-out if no action is taken could create a global
financial shock.

“It is almost impossible to fix that problem exclusively just by
one side of the stakeholders involved, let it be the industry
itself or individual supervisors,” BaFin’s president, Felix
Hufeld told Bloomberg at a forum in Frankfurt, adding that the
industry must be taken seriously.

There has to be “a solution on a political level” outlining a
legislative or regulatory structure to prevent disruption, Hufeld
said.

Britain has taken measures to try and guarantee “contract
continuity” for foreign banks operating in the City, even if
passporting rights are lost, but the EU hasn’t yet reciprocated.

The Bank of England and German regulator BaFin are now working to
the same goal, an indication that Germany is starting to step
into the negotiations as the threat of a no-Brexit deal persists.