Nine financial trade associations have written to European financial services commissioner Mairead McGuinness to ask the European Union to extend its equivalence decision for UK central counterparties ahead of a mid-2022 deadline, when temporary relief is set to expire.
Derivatives trade body ISDA joined groups including the European Banking Federation and the Futures Industry Association to request the EU provide greater clarity over the situation "as soon as possible", noting "there remains a significant risk of disruption to clearing for EU firms and to their access to global markets".
“We would like to see a joint supervisory model that will avoid market disruption, higher risk and elevated costs for EU financial institutions," said Scott O’Malia, ISDA’s chief executive, in a statement.
"We believe that a timely announcement – well in advance of March 2022, when the notice periods for termination of membership by CCPs could be triggered – would provide valuable clarity. We encourage EU authorities to take steps that will ensure they continue to have regulatory oversight of this global market,” he added.
The location of euro swaps clearing following the UK's exit from the EU has become a major flashpoint in the post-Brexit negotiations over financial services. The EU has made clear it wants a greater portion of trading and clearing of euro swaps within its shores.
It has so far refused to grant equivalence for standardised swaps trading subject to the so-called derivatives trading obligation, despite a virtually identical regulatory regime in the UK, causing a large portion of this activity to leave the City of London this year.
The EU, by contrast, has granted temporary equivalence for UK CCPs until mid-2022 in what industry experts believe was a tacit acknowledgement of the considerable risks of a cliff-edge approach.
Even so, McGuinness told a FIA conference earlier this year that the bloc’s temporary relief for UK CCPs “is not a free pass”.
“Rather, it should be used by market participants to reduce their excessive derivative exposures to UK-based CCPs,” she said.
The EU's efforts to grab a larger share of euro swaps clearing are complicated by the fact that roughly three-quarters of this activity doesn't involve EU firms. That dynamic raises the possibility of EU banks and regulators being cut off from the largest global pool of euro swaps clearing in London if the two sides don’t reach an agreement.
“Global cleared derivatives markets are more interconnected than ever in 2021. However, we still face challenges to ensure regulation does not fragment or limit customer access to global markets," said FIA president and chief executive Walt Lukken in a statement.
UK CCPs accounted for 91% of clearing of the euro interest-rate swap market in the first half of 2021, according to post-trade firm Osttra, which said in a recent report that "there has been little or no change in where" interest-rate swaps are cleared.