Trade associations implore EU regulators to extend UK CCP equivalence as deadline looms

Lobbyists highlight concerns around the market impact of simultaneous close-out of positions at UK CCPs, market fragmentation and lack of liquidity at EU CCPs, and increased costs.

In an open letter to the European Commission several trade associations have implored the EU regulator to extend its temporary equivalence decision for UK CCPs.

In the build-up to the Brexit deadline, Brussels granted UK CCPs an 18-month temporary equivalence to EU regulation in September last year, due to expire next June, with the intention of allowing participants to reduce their exposure to them.

However, the Association of Financial Markets Europe (AFME), the Alternative Investment Management Association (AIMA), the European Association of Public Banks (EAPB), the European Banking Federation (EBF), the European Fund and Asset Management Association (EFAMA), Futures Industry Association (FIA), the Investment Company Institute (ICI), the International Swaps and Derivatives Association (ISDA), the Securities Industry and Financial Markets Association (SIFMA AMG) have requested this be extended.

In their letter, the associations suggest that the expiration of this equivalence decision next year would pose risks to the market relating to the simultaneous close-out of positions at UK CCPs, market fragmentation and lack of liquidity at EU CCPs, and increased costs.

They also highlighted that the expiration of the equivalence could minimise the oversight the European markets authority, ESMA, has over the market.

“There are a number of factors that limit their ability to prepare for the expiry of the current time-limited equivalence decision for UK CCPs at the end of June 2022, including the fact that the range and depth of clearing services offered by the UK CCPs is still not replicated in the EU5,” said the associations in their letter.

Their letter also highlighted that in line with the EU’s intention to move more liquidity onto EU CCPs, this was a process that should and is taking place naturally.

According to data from LSEG’s clearinghouse LCH and European CCP Eurex, Eurex has seen its market share for euro denominated interest rate swaps increase by 0.5% per month, while LCH’s share has decreased by a similar amount.

“There is already clear evidence of liquidity flowing towards EU CCPs, and our expectation is that this will continue,” the letter added. “We would welcome an extension to the current time-limited equivalence decision to allow this natural, market-led shift to continue and also to allow EU CCPs to continue to develop their offering.”

Clearing has been one of the key battlelines drawn between the UK and the EU following Brexit. Speaking to the Treasury Committee in February earlier this year the governor of the Bank of England, Andrew Bailey, warned that tensions between the two nations would rise quickly if the EU tried to push euro-derivatives clearing out of the UK.

At the end of the 18-month equivalence next year, 25% of euro-derivatives clearing would move to the bloc, however, Bailey has suggested this is not a viable chunk and that the EU could potentially try to “force or cajole” the remaining 75% out of the UK.