European Commission Grants 18 Months Equivalence to UK CCPs

The European Commission says the decision will give financial market participants time to reduce their “excessive” exposures to UK-based CCPs.

The European Commission has formally granted temporary equivalence and recognition for CCPs based in the UK, allowing them to continue to provide clearing services in the EU at the end of the Brexit transition period.

The equivalence decision is time-limited and will expire in June 2022 (18 months), and will avoid forcing EU financial firms having to exit UK clearing houses before the end of this year.

The Commission says the decision will give financial market participants time to reduce their “excessive” exposures to UK-based CCPs, and allow EU CCPs the time to build up their clearing capability.

“The heavy reliance of the EU financial system on services provided by UK-based CCPs raises important issues related to financial stability and requires the scaling down of EU exposures to these infrastructures,” it said. “Industry is strongly encouraged to work together in developing strategies that will reduce their reliance on UK CCPs that are systemically important for the Union.”

As of August 2020, there were GBP 60 trillion (USD 76.5 trillion) of derivative contracts between UK CCPs and EU clearing members, GBP 43 trillion of which are due to expire after December.

LCH, a unit of the LSE (London Stock Exchange), clears the bulk of euro-denominated interest rate swaps, which are widely used to hedge against adverse moves in borrowing costs.

The decision will allow the European authorities to finalise the remaining steps for recognition of UK CCPs, enable UK CCPs to continue to provide clearing services to their EU members, and allow EU banks to continue meet their obligations to UK CCPs, the Commission said.

“The decision is an important step to mitigate financial stability risks around the end of the year when the implementation period following the UK’s exit from the EU comes to an end,” said the Bank of England, which regulates LCH. “Both the UK and EU have publicly recognised that avoiding this cliff-edge is in the interest of international financial stability.”

FIA also welcomed the decision, saying it ensures financial stability, operational continuity and market access for customers. “During these uncertain times, it is imperative that businesses have access to clearinghouses and the risk mitigating services they provide.”