30 November 2020

EFAMA: Joint Association letter to the EC on the equivalence of UK derivatives regulated markets under EMIR Article 2a

..equivalence decisions are still outstanding in other critical areas of financialservices, including in relation to UK regulated markets under EMIR Article 2a. This is astandalone issue, for EU EMIR purposes only, and can be addressed independently...

FIA, ISDA, AFME, ICI, AIMA, EBF and EFAMA (together the Associations) welcome the
European Commission's (the Commission) timely and temporary equivalence decision from
21 September 2020 with respect to UK central counterparties (CCPs) and subsequent
recognition decisions by ESMA of CCPs and the recent temporary equivalence decision for
UK Central Securities Depositories (CSDs) under CSDR. Together, these steps have provided
much needed certainty for continued and uninterrupted access to these CCPs and CSDs by
EU clearing members and EU firms.

However, equivalence decisions are still outstanding in other critical areas of financial
services, including in relation to UK regulated markets under EMIR Article 2a. This is a
standalone issue, for EU EMIR purposes only, and can be addressed independently of the wider question of recognition of UK regulated markets for other purposes.1 The failure to grant equivalence determinations for UK regulated markets for the purpose of EMIR Article 2a before the end of the transition period will result in negative impacts for EU market participants and EU derivatives markets, create an uneven playing field and operational challenges for EU banks and investments firms (as explained below) and will ultimately impact corporate end-users and the real economy in the EU.

UK regulated markets offer for trading a broad range of exchange-traded derivatives (ETDs) that are widely used for risk-management purposes by market participants in the EU and elsewhere. In many cases, UK regulated markets provide market users with uniquely deep and liquid markets with global participation (and hence a wider number of potential counterparties) and there is no direct substitute for some UK ETDs on regulated markets in the EU or in other third countries. EU firms are major users of these markets for hedging/risk mitigation purposes as well as investing.

Derivatives traded on non-equivalent third-country regulated markets are regarded as “OTC derivatives” under EMIR.2 In the absence of equivalence under EU EMIR Article 2a, ETDs traded on UK regulated markets will be considered as OTC derivatives after the end of the transition period for the purposes of determining (i) whether small financial counterparties (SFCs) have breached the clearing threshold to become financial counterparties (FCs) or (ii) whether non-financial counterparties (NFCs) have breached the clearing threshold to become NFC+s.

Adverse impacts of re-classification as an FC or NFC+ include (i) an SFC being treated as an FC would result in its transactions being subject to mandatory clearing under the EMIR clearing obligation for the first time; (ii) a counterparty being treated as an NFC+ may result in its transactions being subject to mandatory clearing under the clearing obligation, bilateral exchange of margin and other risk mitigation obligations under EMIR; (iii) the NFC+’s inability to rely on an FC to mandatorily report OTC derivatives transactions under EMIR on its behalf,3; and (iv) certain transactions of such FC or NFC+s may become subject to the derivatives trading obligation under EU MiFIR. The Associations’ members also point to resulting market inefficiencies and fragmentation of liquidity pools and emphasize that this represents both a threat to end users’ ability to manage risk, and a consequent impediment to corporate investment if NFCs decide to reduce their positions in UK ETDs to avoid becoming NFC+s.....

Full letter - EFAMA

© EFAMA - European Fund and Asset Management Association