On 1 January 2021, the UK will leave the Single Market. Today's temporary equivalence decision aims to protect financial stability in the EU and give market participants the time needed to reduce their exposure to UK CCPs.
The European Commission has today adopted a time-limited decision to
give financial market participants 18 months to reduce their exposure to
UK central counterparties (CCPs).
A CCP is an entity that reduces systemic risk and enhances financial
stability by standing between the two counterparties in a derivatives
contract (i.e. acting as buyer to the seller and seller to the buyer of
risk). A CCP's main purpose is to manage the risk that could arise if
one of the counterparties defaults on the deal. Central clearing is key
for financial stability by mitigating credit risk for financial firms,
reducing contagion risks in the financial sector, and increasing market
transparency.
The heavy reliance of the EU financial system on services provided by
UK-based CCPs raises important issues related to financial stability
and requires the scaling down of EU exposures to these infrastructures.
Accordingly, industry is strongly encouraged to work together in
developing strategies that will reduce their reliance on UK CCPs that
are systemically important for the Union. On 1 January 2021, the UK will
leave the Single Market. Today's temporary equivalence decision aims to
protect financial stability in the EU and give market participants the
time needed to reduce their exposure to UK CCPs.
Valdis Dombrovskis, Executive Vice President for an Economy that Works for People said: “Clearing
houses, or CCPs, play a systemic role in our financial system. We are
adopting this decision to protect our financial stability, which is one
of our key priorities. This time-limited decision has a very practical
rationale, because it gives EU market participants the time they need to
reduce their excessive exposures to UK-based CCPs, and EU CCPs the time
to build up their clearing capability. Exposures will be more balanced
as a result. It is a matter of financial stability.”
Background
On the basis of an analysis conducted with the European Central Bank,
the Single Resolution Board and the European Supervisory Authorities,
the Commission identified that financial stability risks could arise in
the area of central clearing of derivatives through CCPs established in
the United Kingdom (“UK CCPs”) should there be a sudden disruption in
the services they offer to EU market participants. This was addressed in
the Commission Communication of 9 July 2020,
where market participants were recommended to prepare for all
scenarios, including where there will be no further equivalence decision
in this area.
European Commission
© European Commission
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