Brussels has moved to ease concerns about a potentially damaging post-Brexit arm wrestle over the location of derivatives clearing by announcing plans to extend temporary relief for UK clearinghouses that was due to expire next year.
Mairead McGuinness, the European commissioner in charge of financial services, said in a statement on Wednesday that the European Commission still wants to reduce what it sees as an over-reliance on UK central counterparties. But she also said the Commission’s original timeframe of June 2022 to build a "strong and attractive" clearing capacity in the EU was too short.
“That is why I will propose an extension of the equivalence decision for UK CCPs in early 2022,” McGuinness said, without detailing a new timeframe.
“But this extension of equivalence does not address our medium-term financial stability concerns. I also intend to come forward next year with measures to make EU-based CCPs more attractive to market participants,” she added.
The announcement will please many in the financial industry. Nine financial trade associations wrote to McGuinness in September to ask the Commission to extend its temporary relief for UK clearers, noting “there remains a significant risk of disruption to clearing for EU firms and to their access to global markets".
“We welcome the fact that the European Commission has provided early visibility on its plan to propose an extension of equivalence for UK CCPs," said Ulrich Karl, head of clearing services at trade body ISDA. "We also agree that measures to make the EU more attractive as a competitive clearing hub are the most effective way for the EC to achieve its goals."
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 clearing of euro swaps within its shores. Even so, it originally 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.
Roughly three-quarters of euro swap clearing activity doesn't involve EU firms, complicating Brussels’ efforts to take a larger share. 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.
So far at least, there has been little sign of the market moving of its own accord despite the UK officially leaving the EU at the end of 2020. Post-trade firm Osttra said in a recent report that "there has been little or no change in where" interest-rate swaps are cleared, with UK CCPs accounted for 91% of clearing of the euro interest-rate swap market in the first half of 2021.
McGuinness said the Commission would focus on measures aimed at building domestic clearing capacity to make the “EU more attractive as a competitive and cost-efficient clearing hub.” She also said the EU must strengthen its supervisory framework for CCPs.
“This proposed way forward strikes a balance between safeguarding financial stability in the short term – which requires taking an equivalence decision to avoid a cliff-edge for EU market participants – and safeguarding financial stability in the medium term – which requires us to reduce this risky over-reliance on a third country,” she said.
Updated story: Updates with additional comment in six paragraph