EU Consults on Expanding Central Clearing02.08.2022
The European Commission has adopted a decision to extend equivalence for UK central counterparties (CCPs) until 30 June 2025. This decision will ensure the European Union’s financial stability in the short-term.
In addition, the Commission has also launched today a targeted public consultation and a call for evidence on ways to expand central clearing activities in the EU and improve the attractiveness of EU CCPs in order to reduce the EU’s overreliance on systemic third-country CCPs. The aim of this consultation is also to seek stakeholders’ views on changes to supervisory arrangements for EU CCPs. More attractive, and better supervised, EU CCPs will enhance the benefits of the Single Market for EU financial market participants and EU businesses.
We must reduce overdependence on CCPs outside the EU as a matter of financial stability.
Today we are launching a public consultation on developing clearing in the EU, while extending equivalence for UK CCPs for 3 years to allow us build up capacity.
— Mairead McGuinness (@McGuinnessEU) February 8, 2022
Commissioner MaireadMcGuinness, responsible for Financial Stability, Financial Services and Capital Markets Union said: “Ensuring financial stability and further developing the Capital Markets Union are our key priorities. Central clearing parties (CCPs) play an important role in mitigating risk in the financial system. The Commission plans to come forward with measures to reduce our excessive dependence on systemic third-country CCPs, and to improve the attractiveness of EU-based CCPs while enhancing their supervision. We call upon all relevant stakeholders to engage in the consultation being launched today.”
In the second half of 2022, the Commission intends to come forward with measures to develop central clearing activities in the EU. First, the aim is to build domestic capacity, making the EU a more competitive and cost-efficient clearing hub and to enhance EU CCP’s liquidity. Secondly, it is essential that risks are appropriately managed and the EU’s supervisory framework for CCPs is strengthened, including a stronger role for EU-level supervision.
This proposed way forward strikes a balance between preserving EU financial stability in the short term and building a strong and competitive Capital Markets Union in the coming years.
A CCP is an entity that reduces systemic risk and enhances financial stability by standing between the two counterparties in a derivatives contract (i.e. acting as buyer to the seller and seller to the buyer of risk). A CCP’s main purpose is to manage the risk that could arise if one of the counterparties defaults on the deal. Central clearing is key for financial stability by mitigating credit risk for financial firms, reducing contagion risks in the financial sector, and increasing market transparency.
In the long run, the heavy reliance of the EU financial system on services provided by UK-based CCPs could raise important issues related to financial stability.
In September 2020, the Commission adopted a time-limited equivalence decision for UK CCPs until 30 June 2022 to avoid any possible financial stability risks. In this equivalence decision, market participants were urged to take action and reduce their exposures to UK CCPs.
Over the course of 2021, the Commission established a Working Group (together with the European Central Bank, the European Supervisory Authorities and the European Systemic Risk Board) to explore the opportunities and challenges involved in transferring derivatives from the UK to the EU. The discussions at the Working Group showed that a combination of different measures to improve the attractiveness of clearing, to encourage infrastructure development, and to reform supervisory arrangements were needed to build strong and attractive central clearing capacity in the EU in the years to come. The timeframe of June 2022 was too short to achieve this. Therefore, today’s extension decision was necessary.
On 10 November 2021, Commissioner McGuinness announced that the Commission would propose an extension of the equivalence decision.
For More Information
Source: European Commission
Watch this space closely. Three years is short to build up capacity, @McGuinnessEU, as so much is at stake in building efficient CCP infrastructures: well capitalised counterparties, stable legal environment, interconnectedness, etc. See our analysis: https://t.co/qcUPWow3y7 https://t.co/VuTjyps4Lk
— Karel Lannoo (@karel_lannoo) February 8, 2022
Initial margin for centrally cleared markets increased by $300bn over March 2020.
LCH SwapAgent said trade highlights its coordination of the transition to risk free rates for non-cleared OTC ...
CPMI and IOSCO encourage work to enhance transparency regarding new access models and facilitate porting.
CCP clearing will be particularly advantageous for capital treatment.
Users can further consolidate their CDS portfolios in the clearing space.