Market Has 18 Months To Cut Exposure To UK CCPs

Brexit Muddles Future of UK-EU Linkage

The European Commission has today adopted a time-limited decision to give financial market participants 18 months to reduce their exposure to UK central counterparties (CCPs).

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.

The heavy reliance of the EU financial system on services provided by UK-based CCPs raises important issues related to financial stability and requires the scaling down of EU exposures to these infrastructures. Accordingly, industry is strongly encouraged to work together in developing strategies that will reduce their reliance on UK CCPs that are systemically important for the Union. On 1 January 2021, the UK will leave the Single Market. Today’s temporary equivalence decision aims to protect financial stability in the EU and give market participants the time needed to reduce their exposure to UK CCPs.

Valdis Dombrovskis, Executive Vice President for an Economy that Works for People said: Clearing houses, or CCPs, play a systemic role in our financial system. We are adopting this decision to protect our financial stability, which is one of our key priorities. This time-limited decision has a very practical rationale, because it gives EU market participants the time they need to reduce their excessive exposures to UK-based CCPs, and EU CCPs the time to build up their clearing capability. Exposures will be more balanced as a result. It is a matter of financial stability.”


On the basis of an analysis conducted with the European Central Bank, the Single Resolution Board and the European Supervisory Authorities, the Commission identified that financial stability risks could arise in the area of central clearing of derivatives through CCPs established in the United Kingdom (“UK CCPs”) should there be a sudden disruption in the services they offer to EU market participants. This was addressed in the Commission Communication of 9 July 2020, where market participants were recommended to prepare for all scenarios, including where there will be no further equivalence decision in this area.

For more information

Link to today’s decision

Source: European Commission


Following the confirmation of the European Commission adoption of a time-limited equivalence decision for UK CCPs, Oliver Moullin, Managing Director at AFME said:

“We welcome today’s confirmation that the Commission has adopted a time-limited equivalence decision for UK CCPs. This is a vital step to address an important financial stability risk and ensure continued access for EEA firms to clearing services at the end of the Brexit transition period. It is important that ESMA now proceeds with timely recognition.

We hope that progress will be made in the negotiations and completing equivalence assessments in other areas. We continue to encourage EU, the UK and national member states to take action to address remaining risks at the end of the transition period such as the implications of the trading obligations for shares and derivatives, and continued servicing of existing contracts.”


Bank of England welcomes the equivalence decision

The decision is an important step to mitigate financial stability risks around the end of the year when the implementation period following the UK’s exit from the EU comes to an end. However, this equivalence decision is time-limited and will expire in June 2022.

The decision will avoid EU financial firms having to exit UK clearing houses before the end of the year. This would have led to the transfer and replacement of a very large number of contracts in a short period.

As of August 2020 there were £60 trillion of derivative contracts between UK CCPs and EU clearing members, £43 trillion of which was due to expire after December.  

Both the UK and EU have publicly recognised that avoiding this cliff-edge is in the interest of international financial stability. This has been highlighted by the Bank of England’s Financial Policy Committee consistently since 2018.  

Today’s decision will allow the European authorities to finalise the remaining steps for recognition of UK CCPs. These will enable UK CCPs to continue to provide clearing services to their EU members, and EU banks to continue meet their obligations to UK CCPs.   

In the UK, HM Treasury and the Bank of England have already put in place a temporary recognition regime for non-UK CCPs. From 1 January 2021 this will enable EU CCPs to continue to provide services in the UK.

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