Prospect Magazine, October 2018 edition, runs an article by Jay Elwes entitled “The Brexit Crunch”, and it is very important indeed. A precis of the article follows. Long-ish, but bear with me:

In 2008 the total value of all CDOs (Collateralised Debt Obligations) and Credit Default Swaps, both types of derivatives, was $458 trillion. One might be forgiven for imagining lessons have been learned, pace Warren Buffet, who severely criticized the derivatives business last time. But no. The current value of all derivatives at the moment is now an astonishing $542.4 trillion, and, furthermore, the modern type of derivative is designed not so much to allocate risk but to conceal it.

The last disaster was caused by over-stretched sub-prime house borrowers. This time it is Brexit.

It seems the British government is going to pass a law allowing EU companies to work on derivative trades post- Brexit, but the EU has made no corresponding offer. If no agreement is forthcoming British finance companies will be unable to operate in the EU. The value of the EU derivatives operated by British companies in the EU is about £27 trillion at any one time. If there is no agreement between the UK and the EU, the legal basis of the derivatives will disappear the day Brexit is effective, and the British companies would have to apply for permission to trade with every country in which they operate. It is possible that the European Court of Human Rights would ensure that freedom to enter contracts, and property rights over derivatives, would be maintained. But it would take time to litigate, and the British companies need immediate clarity.

Worse than this threat of disruption is the fact that after 2008 regulators pushed derivates into clearing houses, the biggest of which is LCH (formerly London Clearing House). LCH clears billions of EU trades every day. When Brexit happens LCH and other clearing houses will be regarded by the EU as “third country entities”, and would lose their right to trade in the EU. Banks would have to move their businesses into continental clearing houses, and find someone prepared to buy all the trades they individually have on their books, a tall order. This in turn would create a stampede to sell assets built up over many years, amounting to an estimated £33 trillion.

The European Banking Authority has said in a statement that “firms cannot take for granted that they can continue to operate as at present, nor can they rely on as yet unrealised political agreements”. This matter of derivatives could cause a giant international meltdown and is arguably the least discussed, but most important issue, about Brexit, not, of course, even thought about (or understood?) by Brexiteers.

Were I not of Epicurean persuasion I would add: Heaven help us!