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There have been some recent positive signals from European Union (EU) authorities that action will be taken to mitigate disruption to EU 27 participants in the event of a hard Brexit. In particular, European officials have indicated that EU 27 firms will be temporarily able to continue accessing UK central counterparties (CCPs) following a no-deal scenario.
This reassurance is critical and welcome. Under the current framework, the UK would become a third country under EU law after Brexit, requiring its CCPs to apply for recognition from the European Securities and Markets Authority in order to continue providing clearing services to EU entities. However, the application process can’t begin until the UK has actually left the EU. If this occurs suddenly on March 29, 2019, without a withdrawal agreement or transition period in place, EU 27 firms could abruptly find themselves unable to act as clearing members at UK CCPs for a period of time.
EU counterparties would have little choice but to migrate the thousands of affected contracts to EU-recognized CCPs, which would result in punitive costs, significant operational challenges and likely disruption to markets. That’s if it’s even possible – a migration of this scale has never been attempted before, while substitutes are not available in the EU for all affected contracts.
Disruption is likely to be felt well in advance of the potential cliff-edge Brexit date. Faced with the prospect of suddenly being shut out of UK clearing houses, EU participants are likely to take costly and potentially irreversible mitigating actions – to the extent they can – months in advance of Brexit. In fact, UK CCPs will have to give prior notice to EU clearing members to ‘offboard’ in order to ensure they are compliant with EU law.
Providing certainty now over the application and scope of any EU time-limited recognition regime will avoid the need for EU 27 participants to take action, and ensure markets continue to function efficiently and without disruption.