BoE welcomes 'crucial' EU step to avoid no-deal financial crunch

The Bank of England has welcomed a "crucial and positive" move by the EU to help keep a key part of the financial system functioning in the event of a "no-deal" Brexit.

EU officials said they were taking action so that European firms could continue clearing derivatives transactions at UK operators such as LCH for a year from the UK's departure.

The rules relate to trillions of pounds worth of contracts, such as interest rate swaps, that underpin the financial system.

LCH, an arm of the London Stock Exchange (Other OTC: LDNXF - news) , clears more than 90% of interest rate swaps in Europe - contracts that allow banks and companies to shield themselves against unexpected moves in interest rates harming their business.

The Bank of England said: "Today's announcement is a crucial and positive step.

"It provides necessary clarity and addresses one of the most important financial stability risks associated with the UK's withdrawal from the EU."

The Bank had previously warned of the prospect of an unprecedented financial crunch in March with derivatives effectively ceasing to function unless Europe came up with a fix.

In the UK, the BoE (Shenzhen: 000725.SZ - news) and the Treasury have already put in place a temporary recognition regime to allow EU financial firms to continue to provide services in the UK.

The Bank's Financial Stability Report last month highlighted that EU customers had derivative contracts via UK firms with a value of £60tn, of which £45tn would mature after next March.

The European Commission said its action provided temporary "equivalence" for UK clearing houses "to ensure that there will be no immediate disruption in the central clearing of derivatives".

But officials also pointed out that European clients of UK firms "need to prepare for a scenario in which their provider is no longer subject to EU law".

That contrasts with Britain's decision to offer broad access for banking, insurance and other financial services from the EU.

The BoE had wanted EU contingency plans to include legal continuity of cross-border insurance contracts.

Catherine McGuinness, the City of London (LSE: CIN.L - news) corporation's policy chair, said the decision provided "vital clarity to UK clearing houses and their customers in the EU".

Hugh Savill, director of regulation at the Association of British Insurers, said the action on derivatives was welcome.

But he added: "It is extraordinary that the EU authorities will act to help major financial institutions, but not millions of ordinary people living in Europe whose insurance and pension contracts happen to be held in the UK."

The EU's contingency measures do not change the fact that UK financial services firms will lose "passporting" rights enabling them to operate freely across the bloc when Britain leaves the EU.