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BrackenJuly 3 2017

The importance of a Brexit adaptation period and a capital markets union

BNY Mellon's Michael Cole-Fontayn calls for the financial community to unite in urging policy-makers to mitigate disruption during Brexit, and ensure the preservation of open financial markets.
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On June 8, we saw two major developments that will be of critical importance to financial markets across Europe.

First, the UK went to the polls again to elect a government to lead the country and handle the Brexit negotiations. The resulting hung parliament has the potential to make clear decision-making on Brexit a challenge.

That said, the financial community needs to continue to make one thing clear to the new political leadership: both sides of the Brexit negotiating table need to keep the issues of financial stability and open markets high on their agenda.

Resilience is imperative

The UK’s exit from the EU has the potential to disrupt the infrastructure that underpins financial markets. Ensuring robust and resilient financial services throughout the two years of Brexit negotiations and beyond is of utmost importance to the economic and financial future of everyone.

The euro-clearing discussion is a prime example of potential risk. There is the possibility that a Brexit outcome will mean that entities located and supervised in the EU27 will no longer be able to use central counterparties (CCPs) located in the UK to clear euro-denominated derivatives. Such an outcome would increase systemic risk, increase costs for market participants and end users, and could increase the potential for significant market disruption. We welcome the European Commission’s plans to consider alternative options to a policy of forcible relocation, so that integrated financial markets can be preserved in a post-Brexit environment.

Another major risk to financial stability is the possibility of a lack of transition arrangements. The global financial services community is united in calling for an adaptation period between the UK’s expected departure from the EU on March 30, 2019, and the final implementation of the agreement on the future relationship between the UK and EU.

CMU momentum

The second event on June 8 was the publication by the European Commission of its mid-term review of the Capital Markets Union (CMU) action plan. This was very welcome as it is evidence that the CMU initiative has renewed momentum.

The CMU will be a foundational project supporting investment, jobs and growth across the EU27. We believe it has the potential to form the backbone of a smart and sustainable programme for developing European financial infrastructure and capital markets.

The programme will deepen the range and size of capital pools available for issuers, infrastructure projects and indirectly benefit the EU’s 22 million small and medium-sized enterprises, support financial integration and increase competition in capital markets.

The CMU’s potential to stimulate change in European capital markets is real, and the need for it is urgent. Advancing digital technologies are providing real-time insights into capital flows, providing greater transparency and enhanced risk management.

Only by removing the barriers to robust and diversified capital markets in Europe can we realise the full potential of our collective economy. With the EU’s most sophisticated capital market set to leave the union, this project takes on even further significance for the EU27. The CMU will support economic growth as well as contribute to the systemic stability and to the European economy’s capacity for risk absorption.

Global openness

There is an important connection between the Brexit negotiations and the CMU initiative. In the same way that the Brexit negotiations should maintain open financial markets between the UK and the EU27, it is critical that the CMU project takes a global perspective, ensuring that the EU27 is open to global sources of capital, global standards and global markets.

There will certainly be difficulties. Brexit raises a fundamental question of how integrated financial markets might continue to exist and be regulated if the unified over-arching legal and regulatory framework within which they developed is no longer supported. But these difficulties would not be insuperable. Enhanced regulatory and supervisory co-operation and collaboration would bring us many steps forward.

All of us in the financial community must unite, make our voices heard and work with regulators, policy-makers, peers, clients and politicians alike in order to best mitigate the risks of disruption, and to gain the benefits of openness and integration of financial markets.

By working together, we can help ensure the ongoing provision of robust and resilient financial services for all of Europe’s 500 million citizens and that they are protected throughout this period of profound structural change.

Michael Cole-Fontayn is chairman for Europe, Middle East and Africa at BNY Mellon and chairman at the Association for Financial Markets in Europe.

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