European Commission confirms 18-month equivalence for UK CCPs

After confirming plans to adopt a time-limited equivalence decision in July, the European Commission has said equivalence for UK CCPs will now end in mid-2022.

UK central clearing counterparties (CCPs) have been granted equivalence by the European Commission for 18 months from January 2021 as the Brexit transition period ends.

In a statement, the Commission said the time-limited equivalence decision was made to ensure market participants have enough time to reduce their exposure to UK-based CCPs.

It was confirmed in July that temporary equivalence would be granted, although further details were not released.  

Access to UK CCPs and issues around clearing have been a primary concern in the industry since the UK voted to leave the European Union in 2016.

The majority of derivatives clearing in Europe currently takes place in London, with the London Stock Exchange Group’s LCH dominating clearing of euro-denominated instruments, and handling around 98% of clearing of interest rate swaps globally.

“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,” the Commission said. “Accordingly, the 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.”

In February, LCH defended itself against claims that euro-denominated clearing activity has moved to continental Europe following the Brexit decision. LCH maintained throughout the UK’s lengthy exit process that it has not seen a shift in activity, however, Cécile Nagel, CEO of EuroCCP, claimed activity is migrating towards continental Europe.

“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,” Valdis Dombrovskis, executive vice president at the European Commission, commented.

“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.”