Legal development

EU extends UK CCP equivalence and looks to win back business long-term

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    Equivalence extended

    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.

    Pre-conditions to clearing

    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.

    The role of UK CCPs

    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.

    EU clearing in the spotlight

    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 possible broadening of entity scope to include entities such as pension scheme arrangements and central banks;
    • the possible broadening of product scope to include products such as equity derivatives, repos and foreign exchange derivatives;
    • whether an exemption for legacy transactions that are moved from a non-EU CCP to an EU CCP would be required;
    • whether EU market participants should be required to clear through an EU CCP (or, alternatively, a non-systemically important non-EU CCP);
    • how EU CCPs could be supported in their expansion of clearing services offered;
    • whether EU-level supervision should be given a stronger role, and which bodies should be involved; and
    • whether related pieces of EU legislation, such as MiFID, the Capital Requirements Regulation and AIFMD, should be amended, to ensure clarity around their interaction with EU EMIR.

    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

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.

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