Today, Commissioner for Financial Services, Financial Stability and Capital Markets Union Mairead McGuinness announced the Commission's proposed way forward for central clearing.
The Commission remains of the view that over-reliance on UK-based
central counterparties (CCPs) for some clearing activities is a source
of financial stability risk in the medium term and will pursue its work
to develop the capacity of EU-based CCPs as a means to reduce such
over-reliance. However, in order to address possible short-term
financial stability risk, linked to an abrupt interruption in access to
clearing services, the Commission will soon propose an extension of
equivalence for UK-based CCPs.
The Commissioner stated:
“Before Brexit, the City of London became the main financial hub
for the trading and clearing of derivatives in the European Union. The
departure of the United Kingdom from the European Union was a
fragmenting event, with consequences in terms of financial stability.
UK-based CCPs now operate outside of the Single Market and the EU's
regulatory framework and over-reliance on these CCPs implies financial
stability risks, notably in the event of stress. Accordingly, the EU's
own clearing capacity must be expanded.
From the very start of Brexit discussions, central clearing was
identified as an activity, where financial stability risk could be
significant in the event of an abrupt disruption in the access of EU
participants to UK-based CCPs. That is why, in September 2020, the
Commission adopted a time-limited equivalence decision for UK-based CCPs
until 30 June 2022 to avoid such a cliff-edge scenario.
In the meantime, the Commission established a Working Group
(together with the European Central Bank, the European Supervisory
Authorities and the European Systemic Risk Board) to explore the
opportunities and challenges involved in transferring derivatives from
the UK to the EU. The Commission learnt from this group that a
combination of different measures – to improve the attractiveness of
clearing, to encourage infrastructure development, and to reform
supervisory arrangements – are needed to build a strong and attractive
central clearing capacity in the EU in the years to come. The Commission
also found that the timeframe of June 2022 was too short to achieve
this.
That is why I will propose an extension of the equivalence decision for UK CCPs in early 2022.
But this extension of equivalence does not address our
medium-term financial stability concerns. I also intend to come forward
next year with measures to make EU-based CCPs more attractive to market
participants, taking into account the results of the assessment
currently being undertaken by ESMA on the systemic importance of
UK-based CCPs. These measures should be built on two pillars:
Firstly, building domestic capacity. Measures to make the EU more
attractive as a competitive and cost-efficient clearing hub, and so
incentivise an expansion of central clearing activities in the EU, will
be needed. In this context, we will explore ways to enhance liquidity in
EU CCPs and to expand the range of clearing solutions on offer from EU
infrastructures
Secondly, supervision. If the EU is to increase its capacity for
central clearing, it is essential that the related risks should be
appropriately managed. We must strengthen the EU's supervisory framework
for CCPs, including a stronger role for EU-level supervision.
This proposed way forward strikes a balance between safeguarding
financial stability in the short term – which requires taking an
equivalence decision to avoid a cliff-edge for EU market participants -
and safeguarding financial stability in the medium term – which requires
us to reduce this risky over-reliance on a third country.
The extension of equivalence should be long enough to allow us to revise the EU supervisory system for CCPs.”