UK-based LCH and ICE Clear Europe should keep EU recognition status, says ESMA report

European securities regulator found that the risks associated with derecognising the Tier 2 central counterparties did not outweigh the benefits of keeping them in place.

The European Securities Markets Authority (ESMA) has recommended specific clearing services provided by LSEG’s LCH and ICE Clear Europe continue to be recognised as of systematic importance in the European Union post-Brexit.

In a report assessing the role of UK-established central counterparties (CCPs) in Europe, the regulator found that LCH’s SwapClear interest rate derivatives clearing service and the credit default swaps (CDS) and short-term interest rate derivatives services provided by ICE Clear Europe should maintain a recognised status in Europe.

The services were identified as systematically important due to their ability to pose potential financial stability risk to the EU or member states because of their dominant market share in certain EU currency denominated products that had created a level of dependency on their services.

“Based on a comprehensive analysis of costs, benefits, and consequences, the assessment concluded that at this point in time the costs of derecognising these clearing services would outweigh the benefits,” said ESMA in its report.

The regulator has instead proposed measures including considering incentives to reduce the size of EU exposures to said Tier 2 CCPs, revising its compliance framework, expanding its crisis management toolbox or enhancing its cooperation with UK authorities on CCP recovery and resolution.

ESMA added that the findings of its report would also provide “important input” in the European Commission’s deliberations over a potential extension of its temporary equivalence for UK-based Tier 2 CCPs early next year.

European Commissioner, Mairead McGuiness, confirmed in November her intentions to extend equivalence for CCPs post-Brexit following an open letter from trade associations in September.

“LCH Ltd remains committed to working with relevant regulatory authorities to offer clearing services to our customers, ensure the orderly functioning of markets and support financial stability,” said a spokesperson from LSEG.