MNI POLICY: BOE Cunliffe: Expects EU Action On Derivatives

-BOE Cunliffe Highlights Growth In Leveraged Loans

By David Robinson

     LONDON (MNI) - Jon Cunliffe, Deputy Governor for Financial Stability at the

Bank of England, said he expected the European Union to facilitate continuity of

derivatives contracts following Brexit and expressed concern about growth in

leveraged loans.

     Following are key points from a hearing by the lower house of parliament's

Treasury Committee, which was looking into his recent re-appointment for a fresh

five-year term:

     -- The UK is implementing a "temporary permissions" regime to allow

financial service business to go on as usual post Brexit, but the EU authorities

have not yet reciprocated.

     Cunliffe told the Treasury Committee "My guess is we will see some action"

on cleared derivatives, adding that "No one wants the dislocation around the

existing (derivatives) stock."

     He cited supportive statements from the European Securities and Markets

Authority and German regulatory body BaFin.

     The Bank of England Financial Policy Committee has highlighted the risk of

a no deal Brexit preventing continuity of contract for cleared derivatives. A

sudden break could make it illegal to service existing contracts.

     -Cunliffe accepts that financial sector jobs will move from the UK to the

continent as a result of Brexit, with firms spending time and money setting up

continental subsidiaries.

     In the event of Brexit taking place with no transition period in March next

year he anticipated 5,000 financial services jobs being lost by day one and this

number would grow over time.

     He cited an estimate by consultancy Oliver Wyman that 35,000 jobs would be

lost and added "I don't have a better estimate than that."

     -Cunliffe said regulators have spent five years preparing for "snap back

risk" -the sharp tightening in global financial market conditions led by U.S.

Federal Reserve rates hikes.

     The Fed started tightening in 2015 but "monetary conditions didn't begin to

tighten until the start of this year ... we are just seeing that tightening

happen," Cunliffe said.

     --The BOE deputy governor highlighted the rapid growth of leveraged loans,

which now amount to 20% of UK corporate bonds and have grown equally rapidly in

the U.S.

     He said that the FPC did not know exactly where the loans were winding up,

with many of them shifting abroad into non-banks, and that they would look at

whether his could loop back to UK financial conditions if things went wrong. He

denied, however, that it was comparable to the sub-prime sector that triggered

the global financial crisis.

     "I am not saying it is sub-prime," he said, but added that he wished people

had been aware of sub-prime earlier and now they were trying to act early.

     --On domestic monetary policy, Cunliffe has been at the dovish end of the

spectrum and he remained sceptical that pay growth would continue to accelerate.

He said he believed labour supply may be underestimated.

     "Domestic inflation pressures, while strengthening a little are not yet

established at levels consistent with inflation at target," he said.

     The latest pay data "do not signal strongly that pay growth will make the

next step to establish itself firmly in 3% territory in line with the May

forecast. We may still be underestimating supply in the labour market. "

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

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