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Bank of England Head Says Brexit Can Bust $25-30 Trillion of OTC Derivatives

Oct. 17, 2017 (EIRNS)—Bank of England Governor Mark Carney said in the House of Commons today that about $25 trillion in over-the-counter (OTC) derivatives are at risk of failing to pay out if "Brexit" is disorderly. What "orderly" means is that new legislation must be passed on both sides well before March 2019, in order for the contracts to be "honored." Otherwise, Carney said, "all the risk, capital, collaterals, and individuals have to move" to a European Union country, which is definitely impossible in his view.

Negotiations between Prime Minister Theresa May and EU Commission President Jean-Claude Juncker in Brussels Monday again failed to make any progress, according to reports.

"There’s nothing the EU or U.K. can do unilaterally," to prevent the failure of those derivatives, Carney said, and "it’s pretty clear that those contracts don’t continue to be valid."

Carney’s warning actually comes from a report by the Bank of England Financial Policy Committee in September, which said it will be "complex and difficult" for derivatives between counterparties in the United Kingdom and the European Union to continue to be valid, or, alternatively, to be rewritten by March 2019. There are "big economic issues" riding on where the contracts were written, and 18 months—or two years—is not enough to change them.

The same applies to the global currency market (foreign exchange), which is $5 trillion in trades/day, with 40% of it traded and booked in London. The United Kingdom also accounts for about half of the global OTC $600 trillion market, according to the Oct. 16 Financial Times.