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The European Commission has today adopted a decision to extend equivalence for UK central counterparties (CCPs) until 30 June 2025. This decision will ensure the European Union's financial stability in the short-term.
In addition, the Commission has also launched today a targeted public consultation and a call for evidence on ways to expand central clearing activities in the EU and improve the attractiveness of EU CCPs in order to reduce the EU's overreliance on systemic third-country CCPs. The aim of this consultation is also to seek stakeholders' views on changes to supervisory arrangements for EU CCPs. More attractive, and better supervised, EU CCPs will enhance the benefits of the Single Market for EU financial market participants and EU businesses.
Commissioner Mairead McGuinness, responsible for Financial Stability, Financial Services and Capital Markets Union said: “Ensuring financial stability and further developing the Capital Markets Union are our key priorities. Central clearing parties (CCPs) play an important role in mitigating risk in the financial system. The Commission plans to come forward with measures to reduce our excessive dependence on systemic third-country CCPs, and to improve the attractiveness of EU-based CCPs while enhancing their supervision. We call upon all relevant stakeholders to engage in the consultation being launched today.”
In the second half of 2022, the Commission intends to come forward with measures to develop central clearing activities in the EU. First, the aim is to build domestic capacity, making the EU a more competitive and cost-efficient clearing hub and to enhance EU CCP's liquidity. Secondly, it is essential that risks are appropriately managed and the EU's supervisory framework for CCPs is strengthened, including a stronger role for EU-level supervision.
This proposed way forward strikes a balance between preserving EU financial stability in the short term and building a strong and competitive Capital Markets Union in the coming years.
Background
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.
In the long run, the heavy reliance of the EU financial system on services provided by UK-based CCPs could raise important issues related to financial stability.