European Union (EU)-based businesses that have obtained financial instruments from U.K. banks may be forced to move those derivatives in preparation for Brexit, in what would be a significant disruption to corporate finances, reports in The Wall Street Journal (WSJ) said Tuesday (Oct. 16).
Known as repapering, the process would involve corporations based in the EU to move products like syndicated loans and currency swaps that they obtained from U.K. banks, though reports warned that there is not yet clarity on how Brexit will affect EU corporates' financial product management. As the publication explained, financial regulations that apply to the city of London may no longer be in effect as soon as March, depending on ongoing Brexit negotiations.
When that happens, EU corporations that have obtained financial products from U.K. banks may have to relocate them. Uncertainty and the threat of paperwork and compliance costs are adding to the existing burden that Brexit imposes on corporates in both the U.K. and EU, reports said.
"CFOs and treasurers are trying to ascertain what Brexit means for their financing arrangements," said Stefan Behr, JPMorgan Chase's head of corporate banking for Europe, Middle East and Africa, in an interview with the WSJ. "There are thousands and thousands of financial contracts ... which could potentially be affected."
Reports said that equates to trillions of euros-worth of financial products that may need to be relocated. Loans, securities and derivatives — worth a combined $2.7 trillion — may need to be moved from U.K. institutions to EU-based ones in the case of a so-called hard Brexit, reports said, citing analysis from Boston Consulting Group (BCG) U.K. LLP. According to BCG research, about 68 percent of trading that occurs in the city of London is done on behalf of EU-based clients.
The publication said companies will be forced to "remain in limbo" until Brexit negotiations progress. Key to this matter is whether the U.K. will secure equivalence status after it leaves the European Union, which would allow non-EU financial institutions to continue servicing EU customers as long as their financial regulations are similar to the EU's.