Key points
• CCPs play a crucial role managing risk in financial markets, which is critical for financial institutions and non-financial users of the markets.
• The importance of CCPs has been recognised since the financial crisis and the regulatory regime around them has been strengthened, with the objective of requiring markets to clear trades through CCPs that are authorised for that particular type of activity.
• Globally, over $600 trillion of derivative contracts are outstanding, both exchange-traded and OTC (Over-the-counter)1 . About 40% of trading appears to take place in the UK and less than 10% in the EU27.
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Currently, clearing is carried out at a pan-European level, with EU27 banks being significant users of UK CCPs and vice-versa, but the UK is by far the dominant centre for clearing.
• If no other arrangements were put in place, after Brexit EU27 banks could find themselves in breach of regulations for maintaining positions in UK CCPs that would no longer be authorised under EU regulations and would suffer punitive capital increases. The same could apply to UK banks with positions in EU27 CCPs, depending on the UK regulatory regime.
• Under EU legislation it is not currently possible for the UK to obtain an equivalence determination or for UK CCPs to obtain recognition in advance of Brexit, in order to continue clearing for EU27 banks.
• It is not practical for EU27 banks to move their existing positions from UK CCPs to those within the EU27, not least because there may not be an equivalent product offering within the EU27.
• If no arrangements are made to manage the transition between regimes at Brexit, there is a risk of market disruption and sharply increased costs of clearing, both of which will affect the nonfinancial end-users of markets in both the UK and the EU27.
• It is likely that if there is prospect of a ‘cliff edge’, customers will need to start triggering their contingency plans in the near future, which would in turn drive the behaviour of CCPs.
• In order to avoid financial instability and disruption to the operation of markets, it is therefore necessary to agree and put in place transitional arrangements that will enable markets to continue operating.
Full paper
© IRSG - International Regulatory Strategy Group
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