DNB and the Financial Stability Committee previously called on the Dutch financial institutions to ensure their Brexit-readiness, and we would stress this once more. With political uncertainty in the United Kingdom remaining, the risk of a no-deal Brexit is undiminished. In a no-deal scenario the provision of financial services from the United Kingdom to financial institutions in the Netherlands could be disrupted. DNB held a survey to take stock of the risks to which Dutch financial institutions and sectors find themselves exposed and how they are preparing to mitigate these risks.
Access to central clearing to hedge risks
Many Dutch financial institutions use the derivatives markets to hedge their risks. The City plays a prominent role in the central clearing of derivatives. A central counterparty (CCP) positions itself between buyer and seller to hedge counterparty risk. Banks and insurers in particular said they considered the loss of access to UK-based CCPs a major risk associated with a no-deal Brexit. It means they would be unable to meet their statutory clearing obligation with UK-based CCPs, which would drive up the cost of central clearing. Not many other CCPs in the EU are capable of accepting large volumes from the United Kingdom at short notice. Dutch financial institutions have started transferring their derivatives contracts to non-UK-based CCPs to a limited extent. DNB welcomes the European Commission's recent decision to safeguard access to UK-based CCPs for a limited period of time in the event of a no-deal Brexit.
Performing derivatives contracts
A no-deal Brexit may lead to complications in the performance of unexpired derivatives contracts that do not involve a CCP. Such contracts are regularly adjusted for reasons of good risk management, which may involve the provision of investment services. UK-based service providers, however, will no longer hold the licence required to perform such services in the event of a no-deal Brexit, which could create obstacles in the risk management of Dutch financial institutions. The survey shows that some of the large Dutch insurers and banks frequently use such contract adjustments, whereas pension funds and small and medium-sized banks use them less often. Various financial institutions said they were aiming to transfer contracts to an EU-based counterparty by the exit date of 29 March 2019. This will help remove obstacles to the risk management of financial institutions in the event of a no-deal Brexit.
Other Brexit-related risks facing the Dutch financial sector
The survey also covered other potential Brexit-related risks. A specific risk facing Dutch insurers is that following a no-deal Brexit UK-based reinsurers might no longer hold the appropriate licence to pay out claims to EU-based insurers. The insurers participating in the survey said they saw sufficient possibilities for absorbing this risk, for example by transferring unexpired contracts to EU reinsurers in good time. A no-deal Brexit could also create barriers to the free exchange of personal data with UK-based parties. Most of the financial institutions in the survey considered this a limited risk. They said they would use the room available under EU privacy laws where needed to enable the free exchange of personal data with non-EU parties. A few financial institutions, however, will need to devote increased attention to this risk, for example those that use a UK-based data centre.
The survey helped DNB gain insight into the relative importance of the different Brexit-related risks to which Dutch financial institutions and sectors are exposed. It also showed us where the institutions stand in terms of their Brexit-readiness. It is imperative that they keep preparing for a no-deal scenario as long as the political uncertainty continues. In addition, a more gradual transition to a new relationship with the UK will also be accompanied by friction and adjustment costs. In the period ahead, we will be in close contact with the European supervisory authorities, the Dutch Authority for the Financial Markets (AFM) and the Dutch Ministry of Finance, about Brexit-related risks the monitoring of the progress financial institutions are making. Where needed, we will address the findings in our regular supervision of individual institutions and in our communications with the organisations representative of the various financial sectors.