17 June 2024

ECB: The derivatives clearing landscape in the euro area three years after Brexit

A high degree of reliance on non-EU services is not in keeping with the goals of the Capital Markets Union (CMU), which aims to foster the development of deep and liquid capital markets in the EU, advance financial integration within the euro area, and preserve financial stability.

When assessing the consequences of Brexit, EU policymakers and authorities expressed concerns about the financial stability risks associated with EU market participants’ heavy reliance on UK clearing services for critical derivatives markets. As at December 2020 almost 80% of the over-the-counter (OTC) derivative positions of euro area clearing participants, as well as large shares of exchange-traded derivatives (ETD), were still being cleared through UK central counterparties (CCPs).^[2] The reliance was particularly pronounced in the case of OTC interest rate derivatives (IRD) in euro and Polish zloty cleared at LCH Ltd, as well as credit default swaps (CDS) and short-term interest rate derivatives (STIR) in euro cleared at ICE Clear Europe (ICEU). Both CCPs are considered to be of substantial systemic importance for the EU.^[3]

To avoid potential cliff-edge risks to EU financial stability, the European Commission implemented a time-limited equivalence decision for UK CCPs.^[4] This was accompanied by a call for EU market participants to reduce their excessive exposures to UK CCPs and for EU CCPs to build up their own clearing capacity. Achieving a more balanced clearing landscape, in which EU CCPs offer safe, resilient and attractive clearing services to EU and international market participants would not only reduce systemic risk, but also support the EU’s open strategic autonomy and contribute to a well-functioning CMU. The following analysis examines the post-Brexit evolution of the clearing landscape, with a focus on the three euro-denominated clearing services considered to be of substantial systemic importance for the euro area. It considers the level of dependency of euro area market participants on third-country CCPs for these services and how the landscape could look in the future.

In the first three years after Brexit, CCPs based in the euro area achieved a modest increase in market share for all three euro-denominated clearing services. This positive development was driven not only by the UK’s withdrawal from the EU, but also by developments in the macroeconomic environment and CCPs’ business decisions. Globally, OTC IRD and exchange-traded STIR increased in terms of total notional outstanding between 2019 and 2023. Over the same period, euro-denominated CDS clearing was volatile, but did not increase considerably....

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