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British CCPs to stay 'equivalent' after end of transition period

Chris Hamblin, Editor, London, 13 July 2020

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According to the European Commission, fund managers in the European Union will be allowed to instruct their brokers to go on trading on behalf of their HNW clients on British exchanges in the same way as today for an as-yet unlimited time after the UK's transitional arrangements for leaving the EU expire at the end of the year.

The European Commission has written: "The commission has identified only one area which may present financial stability risks, namely the central clearing counterparties (CCPs) of derivatives. Therefore, in the short term and in order to address the possible risks to financial stability, the commission is considering the adoption of a time-limited equivalence decision for the United Kingdom in this area. Such a time-limited decision would allow EU-based CCPs to develop further their capacity to clear relevant trades in the short and medium term and EU clearing members to take and implement the necessary steps, including by reducing their systemic exposure to UK market infrastructures.

"In order to enhance the supervision and regulation of clearing activities that are of systemic importance for the union, the EU is currently implementing the EMIR 2.2 Regulation [the European Market Infrastructure Regulation refit, which regulates over-the-counter derivatives]. The commission is adopting the implementing measures that will determine the degree of systemic risk of third-country CCPs and the necessary measures to strengthen the supervision of such CCPs, as well as the possible need for further measures to mitigate those risks."

David Feltes of Capco told Compliance Matters: “The announcement effectively buys the EU financial sector some time and accepts the premise - put forth from the European Central Bank - that the UK's financial market infrastructure right now is the better solution for the EU. Some national regulators (in France and elsewhere) were keen to mandate EU financial market infrastructures, but the London Stock Exchange Group and London Clearing House have done a very effective job of showing everybody that the costs involved in moving, primarily in respect of reduced liquidity, would be substantial.

“Overall, the EU wants to build a duopoly in the EU, with Eurex/Clearstream and probably Euronext/Euroclear. The EU, by time-limiting equivalence, effectively is keeping some leverage over the UK from veering sharply away from EMIR 2.2 or MIFID 2.”

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