European Commission confirms ‘time-limited’ equivalence for UK CCPs

As the European Commission finalises EMIR 2.2, it has confirmed a temporary equivalence decision for UK CCPs from January 2021.

The European Commission has confirmed its intentions to adopt a temporary equivalence decision for UK central clearing counterparties (CCPs) at the end of the Brexit transition period.

The measures will be taken to preserve financial stability in the short-term, the Commission said in an update, and will allow EU-based firms to continue accessing UK-based clearing services from January 2021, once the post-Brexit transition period comes to an end.

While the move is time-limited, the Commission did not provide guidance on when the temporary access rights will expire.

“Such a time-limited decision would allow EU-based CCPs to develop further their capacity to clear relevant trades in the short and medium-term and EU clearing members to take and implement the necessary steps, including by reducing their systemic exposure to UK market infrastructures,” the Commission said.

The issue of clearing and access to CCPs has been at the forefront of concerns in the industry since the UK’s decision to leave the EU in 2016. European firms would face higher capital charges for transactions cleared in the UK if equivalence is not agreed.

The European Union is currently in the process of finalising EMIR 2.2, which will determine the third-country equivalence status of the UK. UK CCPs, including the London Stock Exchange Group’s LCH, largely expect to gain equivalence under EMIR 2.2. LCH dominates clearing of euro-denominated instruments, and currently handles around 98% of clearing of interest rate swaps globally.

At an industry event in February, LCH defended itself against claims that euro-denominated clearing activity has moved to continental Europe following Brexit. 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.

Industry trade bodies, the Futures Industry Association (FIA) and the International Swaps and Derivatives Association (ISDA), recently urged authorities to confirm that it will adopt equivalence decisions under the finalised EMIR 2.2 framework, or grant temporary equivalence for UK CCPs until the rules are implemented.

“The finalisation of EMIR 2.2 is important for the purpose of allowing continued access for EU counterparties and their clients to deep liquidity pools in the UK,” said FIA president and CEO, Walt Lukken. “It is critical that UK CCPs continue to operate either under the finalised EMIR 2.2 or under temporary equivalence until such decisions can be made. We look forward to the EU taking swift action so there is no disruption in the market.”