Pension funds must ensure their asset managers and derivatives counterparties are fully prepared for a possible hard Brexit on 29 March next year, according to a Dutch regulator.
Speaking during a conference hosted by IPE’s sister publication Pensioen Pro last week, Joyce Kerkvliet, senior supervisor for asset management at financial markets regulator AFM, emphasised that both the AFM and its fellow regulator De Nederlandsche Bank (DNB) were taking seriously the risk of no deal being reached between the UK and EU.
The consequence of such an outcome would be that there would be no access to mutual financial markets and no transition period, she said.
At the conference in Rotterdam, Kerkvliet cited derivatives and asset management as examples of possible risks. Outsourcing to a UK entity could no longer be allowed, meaning assets would have to be transferred to an entity within the EU.
Some asset managers have already transferred assets run for EU entities out of UK vehicles, including M&G, Columbia Threadneedle, and First State.
Although derivatives contracts could be continued, UK-based broker-dealers could be blocked from applying changes after a hard Brexit, Kerkvliet added.
In such circumstances it would still be possible to make arrangements between supervisors, such as a memorandum of understanding (MOU) or declarations of equivalence.
The European regulator ESMA has said it intends to agree an MOU with UK supervisor FCA long before 29 March.
An MOU would enable a pension fund to outsource asset management to a UK entity, while declarations of equivalence could solve problems with derivatives and subcontracting of asset management.
However, Kerkvliet warned that such arrangements were not in place yet.
‘Time running out for EU permissions’
A number of UK asset managers, central clearing parties and broker-dealers have set up offices in the EU to handle European clients’ assets or contracts, but the AFM warned that other British companies had been very late to take such measures.
Kerkvliet said that the AFM, like other European regulators, had received a large number of applications from UK parties, and that it couldn’t guarantee that all licences would be granted in time.
The watchdog called on pension funds to discuss the issue with their outsourcing partners and to set up alternative options in case their service providers hadn’t anticipated developments sufficiently.
When asked by Pensioen Pro, DNB made clear that it subscribed to the AFM’s viewpoint.
Michael Lansink, head of trading at risk manager Cardano, said he wasn’t expecting derivatives disasters in the wake of a hard Brexit.
“It is mainly very opaque at the moment, and it potentially generates much legal and operational work,” he said.
He observed that UK banks roughly follow three Brexit strategies for providing derivatives to Dutch clients:
- Use EU-based entities to take on all existing bilateral contracts with the same terms and conditions
- Use EU-based entities only taking on new contracts, with the existing ones remaining in the UK
- Apply for a license with the AFM to keep on serving the Dutch market from the UK
All British banks were highly motivated to keep doing business in the EU, Lansink said, and were sometimes changing strategy or working on more than one option at the same time.
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