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EU staves off financial instability with decision in favour of British CCPs

Chris Hamblin, Editor, London, 29 September 2020

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The European Commission, the nearest thing that the European Union has to an executive branch, has made a time-limited decision to give participants in financial markets - including private banks - 18 months to reduce their exposure to British central counterparties.

A CCP is an entity that reduces systemic risk and makes finance more stable by standing between the two counterparties in a derivatives contract (i.e. acting as buyer to the seller and seller to the buyer of risk). Its main purpose is to manage the risk that could arise if one of the counterparties defaults on the deal. Governments insist on central clearing as a way to diminish credit risk.

The EU dislikes the fact that its financial system relies heavily on services provided by British CCPs. It is strongly encouraging finance houses to work together to develop strategies that will reduce their reliance on British CCPs that are "systemically important for the [European] Union." On 1 January 2021, the UK's transitional period will end and it will begin to treat the EU as a foreign power in every way that matters.

Valdis Dombrovskis, the EU's Executive Vice President for an Economy that Works for People, said: “Clearing houses, or CCPs, play a systemic role in our financial system. We are adopting this decision to protect our financial stability, which is one of our key priorities. This time-limited decision has a very practical rationale, because it gives EU market participants the time they need to reduce their excessive exposures to UK-based CCPs, and EU CCPs the time to build up their clearing capability. Exposures will be more balanced as a result.”

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