Post-Brexit derivatives clearing tussle continues as European Commission clamps down on non-EU CCPs

Regulatory package put forward today by the European Commission is intended to reduce EU participants reliance on CCPs outside of the Bloc and repatriate clearing volumes.

The European Commission has today, 7 December, confirmed its plans to re-claim a large portion of EU clearing volumes as part of an update to the Capital Markets Union (CMU) in its Emir Review.

Under the changes, all relevant market participants will be required to hold active accounts at European CCPs for clearing at least a portion of certain derivative contracts.

As the infrastructure stands, around 90% of over the counter (OTC) EU/US interest rate swaps clearing volumes are handled by the London Stock Exchange Group’s (LSEG) LCH SwapClear in the City. Some volumes have migrated to Eurex in Frankfurt since the UK’s split from the EU, while a portion has also reportedly migrated to CCPs based in the US. Regulators in Europe have deemed the level of EU derivatives clearing taking place outside of the EU to be a systemic risk to the Bloc and the changes implemented today are intended to safeguard against these by reducing EU participants reliance on non-EU CCPs.

There were reportedly discussions of SwapClear moving to Paris post-Brexit however the task was reportedly deemed too costly. “Now EU regulators are trying to find something else,” said a source familiar with the matter. “They want to supervise this critical part of the market.”

“We are supportive of the proposed legislative changes to the European Commission’s Emir Review to streamline the supervisory framework for EU CCPs while safeguarding the objectives of Emir and support the European Commission’s ambition to increase the competitiveness of EU CCPs,” a spokesperson from LSEG said in a statement on 7 December.

“We also welcome the acknowledgement of the importance of continued access for EU firms to UK CCPs in order to hedge their risks in all currencies and manage their costs efficiently. We will continue to engage and cooperate with the relevant regulatory authorities in respect of the long-term recognition of LCH Limited on an ongoing basis under EMIR as well as on ESMA proposed risk mitigation measures.”

UK CCPs ICE Clear Europe, LCH and the London Metal Exchange (LME), were granted a temporary three-year equivalence until June 2025 by regulators in March earlier this year, however, they have since stressed that they will not grant any further equivalence decisions and participants should reduce their reliance on CCPs in the UK.

European exchange operator, Euronext issue a statement yesterday: “After Brexit, European Union deserves resilient, safe, and efficient clearing infrastructures to foster growth and drive the Capital Markets Union. As stated by the Commission, it is imperative that EU based clearing infrastructures can compete effectively on a global level.”

Euronext itself is currently in the process of migrating its clearing operations away from LCH to its internal clearing house Euronext Clearing – formerly CC&G – which it acquired as part of its Borsa Italiana deal. If all goes to plan, cash equities clearing is due to migrate in Q4 of next year while listed derivatives are expected to follow in 2024.