Market Has 18 Months To Cut Exposure To UK CCPs09.21.2020
Today, the @EU_Commission confirmed the adoption of a time-limited #equivalence decision for UK #CCPs.— AFME (@AFME_EU) September 21, 2020
AFME welcomes this vital step in addressing #financialstability risk posed at the end of the Brexit transition
Read our press release: https://t.co/UyvEGbuGjQ pic.twitter.com/V0nvFP5EMO
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.”
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.
Review of trading desks found that incoming banks did not yet retain full control of their balance sheets.
UK has a greater market share than pre-Brexit for on-venue execution of GBP interest rate swaps.
Recognition has been temporarily extended until 30 June 2025.
The trade repository has been providing UK services since the first business day after Brexit on 4 Jan 2021.
European firms could operate temporarily in the UK after Brexit while seeking full authorisation.