On 16 September 2021 a group of finance industry associations representing a wide range of market participants (the “Joint Associations”) sent a letter to EU commissioner Mairead McGuinness of the EU Directorate-General for Financial Stability, Financial Services and Capital Markets requesting an extension of the recognition of UK central clearing counterparties (“CCPs”).
The Joint Associations are: the Association for Financial Markets in Europe (AFME); the Alternative Investment Management Association (AIMA); the European Association of Public Banks (EAPB); the European Banking Federation (EBF); the European Fund and Asset Management Association (EFAMA); the Futures Industry Association (FIA); the Investment Company Institute (ICI Global); the International Swaps and Derivatives Association (ISDA); and the Securities Industry and Financial Markets Association Asset Management Group (SIFMA AMG).
In their letter to Commissioner McGuinness, the Joint Associations note that the time-limited equivalence decision for UK CCPs currently expires on 30 June 2022. On that basis, they asked the Commission to provide clarity as soon as possible and well in advance of March 2022 “in order to prevent negative financial, commercial, operational and level playing field effects on EU counterparties and clearing members and to enable continued access to global pools of liquidity after 30 June 2022”.
In particular, the Joint Associations requested that the Commission extend the equivalence decision for UK CCPs due to the significant risk of market disruption. We have previously discussed the importance of recognizing UK CCPs as equivalent in our article “Brexit: Is Equivalence a Solution for Derivatives Clearing?”. Allowing the equivalence decision for UK CCPs to lapse would mean that the supervisory powers granted to ESMA and the protections under EMIR 2.2 would no longer be available in relation to UK CCPs. As the Joint Associations letter states, “EMIR 2.2 provides a key role for EU authorities in crisis scenarios, giving EU Central Banks of Issue additional powers (including in the event of a crisis) as well as visibility over euro payment and collateral flows.”
Given the risk involved, the Joint Associations asked the Commission to consider granting this further extension for a longer period of time than the current equivalence decision, in order to avoid uncertainty for EU clearing members and their clients.
This extension would ensure that EU counterparties could continue to satisfy their clearing obligations under EMIR through UK CCPs without disruption in the short term; that EU clearing members could continue to offer clearing services on UK CCPs to their clients; that EU CCPs could continue to develop the clearing services that they offer; and that the UK CCPs that currently benefit from temporary recognition would fall under the same regime as other non-EU CCPs that are currently recognised in the EU once EMIR 2.2 has come fully into effect.
Commissioner Mairead McGuinness said in an interview with the Financial Times on 18 October that the EU will not risk market instability with a "cliff edge" decision over banks' access to UK clearing houses.
We and everyone else involved in the market await the outcome with interest. Lack of a further extension, or the granting of a short one, would compel all participants to prepare for a completely new situation next year. We will monitor the progress of this matter.
For further information, please contact Turlough Galvin, Alan Keating, Christian Donagh or your usual Matheson contact.