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--Likely Deal On Existing Contracts, New Contract Negotiations Ahead
LONDON (MNI) - The Bank of England Financial Policy Committee said Friday
there remains a lack of progress in tackling the servicing of derivative
contracts post-Brexit. However, an agreement could be reached on existing
contracts, with negotiations expected further down the line over the treatment
of new contracts.
The notional amounts involved are vast, with the BOE estimating an
outstanding stg26 trillion for uncleared derivative contracts and stg27 trillion
for cleared contracts. Most contracts require EU authorities granting permission
to the UK counterparties and, to date, EU authorities have not announced any
intention to do this.
Cleared derivative contracts require the European Securities and Markets
Authority (ESMA) recognising UK clearing houses. If this does not happen, EU end
users will not have access to UK clearing houses without incurring significant
The issue continues to be entangled with the UK's so far abortive attempts
to agree mutual recognition with the EU for financial services.
The BOE also published details of its 2018 bank stress tests Friday,
toughening the requirements for domestically systemic financial institutions.
Whilst as a whole the FPC noted little change in risk from previously, the
effect of IFRS9 on stress testing is worth noting for domestically systemic
The FPC set out the same stress scenarios as in 2017, including a global
recession and a 33% fall in house prices but focused on raising standards in
line with how significant the institutions are.
The key change comes in the way hurdle rates, the minimum level of capital
a bank has to maintain in all scenarios, are considered under new reporting
In 2017, the aggregate core equity tier one (CET1) ratio hurdle rate was at
6.7% with a systematic reference point placed on significant financial
institutions at 7.7%. This was based on the idea that if the systematic
reference point was not met but these significant institutions were above the
hurdle rate, they could graudally take measures to increase their core capital.
In 2018 an anticipated hurdle rate of 0.7 percentage point will be added.
Crucially, the FPC is now imposing the systemic reference point as the hurdle
rate for domestic significant financial institutions.
This means these institutions would have to meet the strict 8.4% rate and
could not gradually rebuild their core capital. This is part of the BOE's drive
to match risk with resilience, maintaining UK standards above international
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