European Commission considers temporary equivalence to CCPs ahead of the Brexit transition period

The United Kingdom’s decision to cease to be a member of the EU, effectively implemented on February 1st 2020, forced a sector-by-sector analysis of the main areas disrupted to ensure that national authorities, businesses and citizens set contingency measures and a Withdrawal Agreement, signed between the UK and the EU, providing legal certainty in those areas. In accordance with the Withdrawal Agreement, EU law continues to apply to and in the UK for a transition period lasting until December 31st 2020.

However, financial market participants called for an extension of equivalence determinations and further arrangements to ensure a stable long-term relationship for financial services and minimise potential disruption. In a paper published on July 6th, the Association for Financial Markets in Europe (AFME) highlighted the need for continued access for EU firms to UK CCPs, addressing the implications of the MiFID share trading obligation (STO) and the derivatives trading obligation (DTO), and ensuring the continued servicing of existing clients and contracts.

In light of possible risks to financial stability, the European Commission announced on a note on July 9th the intention to adopt a time-limited equivalence decision for the United Kingdom for derivatives CCPs. The Commission noted that “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.”

The Commission is currently taking measures to determine the degree of systemic risk of third-country CCPs and the necessary measures to strengthen the supervision of such CCPs via their consultation on Emir 2.2, and may introduce new measures to mitigate third-party CCP risks in the future. The Futures Industry Association (FIA) warned that a decision needed to be clarified by September when CCPs will need to give notice to clearing members if they need to change their arrangements.

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