The International Swaps and Derivatives Association (ISDA) and eight other trade associations have sent a letter to European Commission (EC) commissioner Mairead McGuiness, requesting that the EC extend its equivalence decision for UK central counterparties (CCPs).
This equivalence decision is set to expire on 30 June, but the associations request that the EC provide clarity as soon as possible and well in advance of March 2022.
According to the associations, this prevents negative financial, commercial, operational and level playing-field effects on EU counterparties and clearing members and will enable continued access to global pools of liquidity after 30 June 2022.
The associations are concerned that if the commission allows the time-limited equivalence decision to expire, EU clearing members would “lose access to UK CCPs that have been determined to be of such substantial systemic importance that they can no longer be recognised.”
EU clearing members would also lose access to UK CCPs that are not systemically important and that would otherwise be able to benefit from recognition under European Market Infrastructure Regulation (EMIR) 2.2.
“The ongoing uncertainty confronting EU clearing members and their clients is already negatively impacting their clearing business,” the associations highlight.
“If the commission is considering allowing the time-limited equivalence decision to expire, we would also welcome the opportunity to discuss the solutions that the commission is considering to mitigate any potential market disruption that may result, and the time that may be needed to develop and implement those solutions.”
The associations argue that having to use a UK and EU central counterparty (CCP) will raise costs and remove opportunities for netting transactions.
“In the event that the equivalence decision is allowed to lapse, there are continuing concerns
about the impacts that a large, simultaneous close-out of positions at UK CCPs (and
corresponding opening of positions at EU CCPs) would have on the market,” the associations say.
“Other concerns include market fragmentation and lack of liquidity at EU CCPs, as well as the concern regarding increased costs and reduced risk mutualisation.”
Additionally, the associations say that no longer allowing UK CCPs to obtain recognition in the EU, would limit the direct oversight and visibility that the European Securities and Markets Authority (ESMA) and relevant EU national competent authorities would otherwise have had over global derivatives markets cleared in the UK.
This is because ESMA would cease to have any supervisory role in relation to UK CCPs and EU national competent authorities (NCAs) would cease to have a role in the colleges of supervisors for UK CCPs.
Elsewhere in the letter, the associations suggest that the commission, and in particular ESMA, need to consider carefully the potential financial stability impact of substantial, systemically important clearing services being provided in the EU by non-EU CCPs.
The associations remain convinced that EMIR 2.2, with its new enhanced recognition framework, gives ESMA appropriate powers to deal with any such financial stability-related concerns that may be identified.
“We urge the commission to address its concerns regarding the systemic importance of the UK
CCPs by relying on the enhanced supervisory powers that EMIR 2.2 gives to ESMA and to the
Central Banks of Issue in relation to Tier 2 CCPs (in conjunction with the enhanced
Memorandum of Understanding between ESMA and the Bank of England).”
The trade associations that have co-signed the letter with ISDA include the Alternative Investment Management Association, the Association for Financial Markets in Europe, the European Association of Public Banks, the European Banking Federation, the European Fund and Asset Management Association, the Futures Industry Association, the Investment Company Institute and the asset management group of the Securities Industry and Financial Markets Association.
At the start of the year, industry expert Tony Freeman said: “Equivalence is a flaky, politically skewed process that most firms do not want to rely on. Its scope is also limited – it does not cover all business segments. Banks and investment managers have therefore created new EU entities to trade with clients and counterparties inside the EU27.”
