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One significant theme to arise following the UK's departure from the European Union (EU) has been that of clearing, in particular the ability for EU market participants to access clearing services in London via UK central counterparties (CCPs), and vice versa.
In this context, there was support across the industry for the European Commission's (EC) decision in February this year to extend equivalence for UK central counterparties (CCPs) until 30 June 2025.
Perhaps unsurprisingly, the EU is currently considering how it can expand its domestic clearing capabilities through enhancing the attractiveness and competitiveness of EU CCPs. In order to explore with the industry how this ambition might be achieved, the EC recently consulted and sought views on expanding central clearing activities in the EU.
Before considering the EU's proposals in more detail, it is worth having a quick refresher on some of the key terminology. The EU classifies CCPs as either:
CCPs are also distinguished between being either:
The EC explored a range of key issues as part of its recent consultation, including the supervisory requirements to which CCPs are subject. From a UK perspective, an important consideration is the EU's apparent intention to increase clearing through qualifying CCPs (i.e. more clearing taking place via EU CCPs) and Tier 1 CCPs (to theoretically reduce systemic risk).
The EC sought views from industry participants on whether this outcome (increased activity through qualifying and Tier 1 CCPs) could potentially be achieved through a combination of:
We are working closely with our members and the European Banking Federation (EBF) to consider the implications of these proposals and the EU's overall objectives. We recognise the need for a more efficient and resilient clearing infrastructure. At the same time, it is important to be mindful of any unintended consequences that could arise from fundamental structural changes to the regulatory environment for clearing and CCPs.
By way of example, many in industry note that the aforementioned clearing obligation (as stipulated by European Market Infrastructure Regulation (EMIR)) should only be applied to products that are sufficiently standardised and liquid, and indeed that all the products that meet these criteria are arguably already subject to the obligation.
Furthermore, there is a widely held view that efforts to forcibly increase clearing activity into a particular jurisdiction (whether it be the EU, UK, or anywhere else) risk impacting competition and market resilience, as well as potentially contributing to greater systemic risk. The EU proposals could potentially give rise to unintended operational issues, such as the need to unwind existing positions with one CCP in order to transfer them to another.
While the overarching objective of the EC's approach is focused on making clearing in the EU more competitive, any changes would ultimately have a global nexus, which would result in multi-jurisdictional impacts. We will continue to monitor related policy developments, and to engage appropriately with members and other key stakeholders as this initiative develops and the EC considers responses to its consultation. For more information please contact email@example.com.
Robert Driver, Principal, LIBOR Transition, UK Finance