EU extends UK CCP equivalence and looks to win back business long-term
28 February 2022
28 February 2022
On 9 February 2022, the EU extended the temporary equivalence granted in respect of the UK's supervisory framework for central clearing counterparties (CCPs) by three years, until 30 June 2025. This in turn paves the way for ESMA to extend its recognition of UK CCPs under EU EMIR for the same period, which will allow EU market participants to continue to clear derivative transactions through UK CCPs until 30 June 2025.
Under EU EMIR 1 , a non-EU CCP is only permitted to provide clearing services in the EU once it has been recognised by ESMA 2 . Similarly, EU market participants that are subject to the EU EMIR clearing obligation are only permitted to clear in-scope transactions through a non-EU CCP if it has been appropriately recognised by ESMA and is listed on the relevant ESMA register. One of the pre-conditions for such recognition is the granting of "equivalence": the adoption of an implementing act by the European Commission determining that the legal and supervisory arrangements applicable to CCPs in the third country in question are equivalent to those of the EU.
ICE Clear Europe Limited, LCH Limited, and LME Clear Limited, all of which are established in the UK, have long been the foremost providers of clearing services in Europe, offering clearing services in respect of a broad range of products. After the UK officially left the EU on 31 January 2020, it became apparent during the ensuing UK/EU negotiations that these UK CCPs are critical to the functioning of the EU financial markets, and that EU market participants would need continued unrestricted access to them after the end of the Brexit transition period. To achieve this, the EU granted temporary equivalence to the UK's CCP regulatory framework from 1 January 2021 to 30 June 2022, with ESMA recognition for all three UK CCPs following shortly thereafter.
The recent extension to UK equivalence, which was originally announced in November 2021, is intended to avoid short-term "cliff edge" effects and, effectively, to give the EU time to determine how best to end what it perceives as over-reliance by EU market participants on UK CCPs and, to coin a Brexit phrase, "take back control" of EU clearing, by drawing EU clearing away from the UK CCPs to EU CCPs.
To this end, the European Commission has recently launched a consultation on the central clearing framework in the EU, asking for feedback on how to improve the competitiveness of EU CCPs and ensure that related risks are appropriately managed. Areas addressed include:
The consultation closes on 8 March 2022 and subsequent legislative proposals are expected to be adopted in Q3 2022.
1 EU Regulation 648/2012
2 The European Securities and Markets Authority
Authors: Kerion Ball and Kirsty McAllister-Jones