UK Central Bank Picks up on Energy Derivatives Warning
The Governor of the Bank of England – the UK’s central bank – has warned of the continuing risk to financial stability posed by derivatives, the legal status of which has yet to be resolved between the UK and EU under Brexit negotiations.
His comments recall a financial risk highlighted, specifically in the energy sector, by traders association Efet earlier this month when it urged the European Parliament to reconsider an amendment they had passed mid-September affecting trade in EU carbon allowances (EUAs).
Mark Carney spoke September 29 on the BBC Radio Today programme about various matters, including risks to financial stability that the bank can identify to the public and government but not itself reduce.
“Let me give you one tangible example today, where we say: there is an issue, which we don’t think we [the bank] can solve – and that relates to Brexit, a specific issue around Brexit – which is in the derivatives market, [where] there is a series of contracts, tens of thousands of contracts, involving hundreds of institutions – European and UK – and the legal validity of those contracts post-Brexit is in question,” said Carney.
“It depends on the kind of arrangement that is ultimately struck. Now that can’t be solved by actions of the institutions themselves, it can’t be solved by actions by the bank or even the UK government itself. It has to be solved ultimately by actions by the EU-27 and the UK.”
He said this played into the issue of an implementation deal between the EU and UK that was “absolutely in the interests of the EU 27 and this country.”
The UK government triggered Article 50 in March 2017, which provides for a two-year negotiation period up to March 2019 by which the UK should leave the EU. However UK prime minister Theresa May last week appealed to EU governments for an extension to that two-year period, to allow a smoother transition, rather than a 'cliff edge' UK exit from the EU. Carney is due to leave his post at the Bank of England in 2019.
Mark Smedley