MNI ANALYSIS: BOE Sees Slow Post-Brexit Derivatives Progress

--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

capital charges.

     The issue continues to be entangled with the UK's so far abortive attempts

to agree mutual recognition with the EU for financial services. 

     --STRESS TEST

     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

financial institutions.

     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

standards.

     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

norms.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; +44 203 865 3828; email: jai.lakhani@marketnews.com

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: M$B$$$,M$E$$$,MC$$$$,M$$BE$]