Following a recent CCP Global regulatory update on August 2nd where law firm Allen & Ovary released a primer on the impact of Brexit on the derivatives industry, it is clear that a careful and considered approach to Britain’s exit from the EU is required, especially during the post-COVID period.
The European Union is set to announce in a few weeks the total length of time permitted for London-based CCPs to continue to offer clearing services for EU customers.
The use of this fixed time-period for continued EU-clearing operations for London CCPs is primarily to ensure that disruption to the clearing eco-system is minimal. The Brexit deadline may also put pressure on clearing members to move positions from London to the EU, however, with the residual effects of the COVID-19 pandemic, slower regulatory changes, there is no conclusive evidence of a discernible shift to EU-CCPs as of yet.
The European Securities and Markets Authority (ESMA), the EU’s markets regulator, have stated they are working towards prudent access decisions and have continued to provide transparent guidance to market participants on the appropriate procedures for preparing for Brexit after the expiration of the transitional period on 31 December 2020.
With London being a large part of Europe’s financial market infrastructure, it is likely that London-based clearing houses will retain their grip on cleared derivatives market in a post-COVID economy. A potential political impact for the UK to remain engaged with EU clearing activities is that the Bank of England (BoE) would be required to permit ESMA to jointly supervise UK-based CCPs. The BoE commended: “multiple hands on the wheel” during a crisis may cause confusion.
With four months to go before Brexit comes into effect, regulators, CCPs and the remaining market participants need to coordinate accordingly to ensure that there is limited impact on the markets.
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