A 'cliff edge' Brexit would put £26 trillion in derivatives contracts at risk, according to Financial Conduct Authority (FCA) executive director of international Nausicaa Delfas.
Addressing delegates at a CityUK and Bloomberg event this morning, Delfas highlighted there were significant risks to insurance and derivative contract continuity in the event of a no-deal Brexit, along with those posed by an abrupt loss of passporting.
She said: 'The FPC [Financial Policy Committee] has estimated 10 million UK policyholders and 38 million EEA policyholders could be affected; and around a quarter of derivatives contracts, £26 trillion worth, could be affected.
'However, the types of contracts affected may be broader than this. You in this room will know well how complex these contracts are, involving not only financing and credit agreements, but also hedges against interest rates and currency movements.
'Our view is that where any of these contracts extend beyond March 2019, the UK and the EU must, together, create contractual certainty, either through an implementation period or by some other means.'
Delfas suggested if this agreement is not achieved, contracts may not be 'appropriately serviced', meaning insurers may not be permitted to pay out claims on policies and derivatives users 'may not be able to manage the risks of their positions'.
The FCA is also working on a proposed temporary permissions regime (TPR) to allow EEA firms and funds using a UK passport to continue to operate without applying for new authorisation.
However, this only helps for 'incoming' business at present, as there is currently no reciprocal TPR arrangement from the EU.
Delfas added: 'And the challenges this presents, in terms of lack of commercial certainty, and business disruption, is clear from my speaking to senior leaders in regulated firms.'
However, Delfas struck an optimistic tone, claiming, while 'the scale of the Brexit challenge is unprecedented', the regulator believes a 'good outcome is achievable'.
She added: 'But we all know time is tight and the path uncertain, so achieving that outcome, and a smooth transition avoiding cliff edges requires energy and commitment from industry and regulators alike.'
The FCA has this morning published a webpage entitled preparing your firm for Brexit, aimed at helping firms understand whether they will be affected by EU withdrawal, and how to manage the transition.