Alarm Raised by EU Loyalist Over ‘Cliff Edge’ Facing Banks

(Bloomberg) -- One of the European Union's most loyal members is voicing deep unease at the path Brexit negotiations are on.

Denmark, which joined the EU the same year as Britain, is urging Brussels to work much faster to avoid the dysfunction that would ensue if the U.K. crashes out without a deal. A key concern is that the EU still doesn't have a tenable plan to ensure banks maintain access to vital financial infrastructure in the form of London-based clearing services, according to Prime Minister Lars Lokke Rasmussen.

“I've pushed hard for the EU Commission to start preparing for a no-deal Brexit,” Rasmussen said in an interview on Friday. “They may well be doing that, but they didn't put a great deal of effort into it.”

Rasmussen voiced the concerns despite a recent EU pledge that banks will have access to London-based clearinghouses even if Brexit negotiations break down. The EU has said that such a fix, which would be based on so-called equivalence rules that let non-member countries provide services to the single market, would be short-term.

Not Enough

Banks and U.K. regulators have been warning for months that EU action is needed to avert the financial-market turmoil that could ensue in a no-deal Brexit. Jesper Nielsen, who is interim chief executive officer at Danske Bank A/S, said the main worry for his industry remains the question of clearing. Assurances to date that the EU is working on the issue are welcome, but not enough, he said.

For Denmark, which is home to the world's biggest covered-bond market, the concern is whether banks will have uninterrupted access to clearing euro-denominated interest rate derivatives. Ulrik Nodgaard, the head of the Danish bankers' association, said that when it comes to Brexit, this is the “one key issue” for financial firms in his country.

“We'd very much like some assurance,'' he said. “This is our cliff edge.''

LCH Ltd., a unit of London Stock Exchange Group Plc, is the most important clearinghouse for euro-denominated interest-rate swaps. LCH's dominance turned clearing into a flash point in the Brexit talks, as EU politicians said more of the business should take place within the single market.

“We would really like to see the EU and ESMA start to work on this,” Nodgaard said, referring to the European Securities and Markets Authority. He says he's asked Rasmussen to put pressure on the EU to fix the issue. Denmark's bank industry wants to see a “transitional regime that will at least ensure that derivatives already in the market can stay in London,” he said.

The Wish List

“Preferably, we'd like to have an equivalent regime with London being under the same regulation the same way it is today,” Nodgaard said. “Obviously, making such a decision takes lots of preparations and sorting of formalities so we'd like to encourage that that work gets underway.”

For Danske, Nielsen also pointed to the issue of the Irish border, which has emerged as the most thorny aspect to Brexit talks.

“A hard Brexit will hit our business very hard because we have a bank in Belfast and our remaining Irish operations in Dublin,” Nielsen said. “So we'll have to operate in across the border, while there are lots of issues with agreements on how to operate financial companies across the border while our Northern Ireland bank has many clients south of the border.''

Some of Denmark's biggest investors have already started preparing for a no-deal Brexit.
Anders Damgaard, the chief financial officer at PFA Pension, which has about $113 billion in assets under management, said “I think everybody's working under the assumption it will be a hard Brexit.

To contact the reporter on this story: Peter Levring in Copenhagen at plevring1@bloomberg.net

To contact the editors responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net;Patrick Henry at phenry8@bloomberg.net

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