Navigating tricky waters: analysing the future of the UK-EU clearing relationship

Executives from LCH, SIX, EuroCCP and Eurex populated a panel at the PostTrade 360 event in Stockholm last week to discuss the current state of affairs in the UK and European clearing markets.

The backdrop of the conversation centred around the European Commission’s declaration to extend equivalence for UK central counterparties (CCPs) by three years to 30 June 2025. After that, there will be no access to the European Union for Britain’s derivatives clearing houses – a decision which has caused backlash from industry players – including Bank of England Governor Andrew Bailey, who said at the time that the proposal seeks to “fragment the international system” and cannot be justified.

It’s all about choice

While the spotlight has shone brightly on relations between the UK and the EU, LCH and Eurex in recent weeks, Ricky Maloney, head of buy side fixed income sales at the German derivatives exchange, said the focus should be on the clients and the choice they have in the market.

“I am very much of the mindset that clients should absolutely have a choice in where they clear,” Maloney told attendees of the conference. “And what drives that choice is optimisation and cost reduction opportunities.”

In response to the European Commissioner’s decision, Maloney said that Eurex has seen different reactions across its European client base. Some, he said, are happy with their relationship with LCH and will continue to use its services as long as they can, while others have looked to futureproof their business from a regulatory perspective and moved their business to Eurex. Some larger clients have looked to diversify their risk, splitting their business across the two platforms.

“That’s the clients’ choice, and for me that’s how it should be,” Maloney continued. “Regulators desperately want to focus on and build up this Capital Markets Union, which makes sense from a European community perspective – but it has to be done fairly for all market participants – because the money they are managing is actually ours, it is our pension funds, investments, etc.”

Joanne Donaghey, director of sales and relationship management at LCH, agreed that the preservation of customer choice is vital for the market. “For users to be able to make a decision on which [platform] works best for them and their requirements, that’s really important. For CCPs, to be able to provide the maximum efficiency there needs to be breadth and depth and product scope to be able to provide multilateral netting and to be able to find that diversity that’s really important for users.”

Interoperability must stay

There was a consensus among the panellists that there has been a degree of harmony among the three CCPs in recent years and it would be damaging to the market as a whole if that was thrown away in light of the European Commission’s decision.

Initially, the regulator had granted an 18-month equivalence window for UK CCPs from the end of the Brexit transition period in January 2021, but agreed the three-year extension last month to avoid any “short-term cliff-edge effects”.

“We have had interoperability between the three CCPs for the best part of a decade now and that regime was due to be finished this year,” stressed Tim Beckwith, head of commercial services and business development at EuroCCP. “So the extension was very much welcome. In the cash market today, you have got good interoperability and you have got good choice and that needed to be reprieved. Thankfully it was, so we can breathe a little in the cash world.”

Brendon Bambury, head of international client relations and sales at SIX, added that a compromise must be reached between the regulators in the EU and the UK ahead of the June 2025 deadline. Otherwise, he said, the market and its participants are going to be the ones who suffer.

“Interoperability has got to stay,” Bambury said. “There has got to be co-operation between the three CCPs, and that is what the market participants want. They want open access and without that interoperability there would not be the competitive environment [that exists today]. There is a reason why the costs for brokers and the banks are as efficient as they are, and it is because of interoperability. Without it, we will go back to the bad old days, which I don’t think anyone wants.”

The panellists agreed that regulatory co-operation is key to ensuring a smooth transition of structures, with the three-year timeline providing the basis to come to an arrangement that suits all parties. “I think it gives them time to really build it out and set the bedrock for the long-term and medium-term development of those conversations,” noted Donaghey, who said that more could be done by market participants to facilitate that co-operation.

“From an LCH perspective, we are fully supportive of the idea that you can do more to increase the co-operation between the regulators,” she said. “From an EU CCP perspective and thinking about LCH SA, anything we can do to streamline the supervisory arrangements to perhaps make them a little more flexible, and [improving] the speed-to-market with some of the innovations would really be welcomed as well.”

The onus now is on the regulators to listen to views from the whole spectrum of the market and deliver a suitable solution for all parties. As Beckwith told the panel, the can has continuously been kicked down the road and it is now time for real action.