Graham Bishop's Evidence to House of Lords: The future of cross-border financial services in the absence of equivalence

21 March 2022

Why so few equivalence decisions have been forthcoming from the EU; why the EU made an exception for CCPs, and whether the recent three year extension is expected to be the last; the impact of the lack of equivalence on UK providers across the industry and how they have adapted;

Conclusions

  1. The current EU regulations flow directly from global standards initiated after the post-2008 crash. These were strongly influenced by the UK, and consistently supported by UK Prime Ministers at the G20. If the proposals were NOT positive for financial stability, then the UK Government should have opposed them at the time and requested the Governor of the Bank of England to cease chairing the Financial Stability Board – the key co-ordinating body.  

2.       After a decade of work on the risks posed by CCPs, the global regulatory community has just published (10 March) a report that recognises the risks accentuated by its policies but – crucially – they are unable to give a clean bill of health to their creature, do not even know how to measure the problem, or know whether adequate tools exist to deal with its risks. The implications for host states of systemically important CCPs are bleak.

  1. The G20 policies have succeeded in bringing about 90% of OTC interest rate derivatives into `central clearing'. The notional amount of sterling and euro derivatives cleared in London are more than sixty times the UK’s GDP.
  2. Since 2008, the EU has built up a body of detailed legislation to implement global standards. The UK assented to this legislation prior to Brexit. The EU signalled its concern about such key infrastructure being located outside a euro area jurisdiction as far back as 2011.
  3. The ECB has NOT pre-committed to providing any emergency euro liquidity and the EU’s co-legislators have explicitly stated (in CCP RRR) that any ultimate use of public funds would be subject to democratic control procedures – so political.
  4. ESMA, ECB and European Systemic Risk Board (ESRB) have undertaken detailed analysis of the risks to the EU’s financial stability arising from UK-based CCPs.
  5. The European Commission has laid out the way forward and believes that extending the equivalence of UK-based CCPs until June 2025 will allow enough time for the EU to develop and implement a plan of action to reduce “risky over-reliance” on them. It hopes to announce this plan in 2H 2022.

 

 

Full paper

 


© Graham Bishop