Wednesday 09 February 2022

European Commission extends UK CCP equivalence by 3 years

On 8 February 2022 the European Commission confirmed that it will extend the time-limited equivalence for UK central counterparties (CCPs) from 30 June 2022 to 30 June 2025.

The original time-limited equivalence decision was made in September 2020 in the run up to Brexit to address concerns around financial stability in the EU due to its reliance on UK CCPs.

Market participants were encouraged to relocate clearing operations from UK CCPs to EU CCPs.

In 2021 the European Commission formed a working group to look at strategies for transferring cleared derivatives from the UK to EU CCPs. It was recognised that the working group needed more time to complete their analysis and put forward recommendations.

In November 2021, Mairead McGuinness, the EU Commissioner responsible for Financial Stability, Financial Services and Capital Markets announced that the European Commission would propose an extension to the equivalence decision because the June 2022 timeframe was considered too short.

While the market had received an indication late last year that an extension to the equivalence decision was expected, the formal confirmation yesterday provides certainty on arrangements at least in the short term. Failure to extend the equivalence decision beyond June 2022 risked disrupting markets by forcing market participants rapidly to close out positions in UK CCPs and reopen them elsewhere.

It is unlikely that there will be a further extension to this time-limited equivalence decision.

In the same announcement the EU plans to progress its current consultation on the development of EU CCPs in the areas of business transfer from the UK, an improved overall infrastructure and the necessary reform of supervisory arrangements to strengthen and enhance central clearing capacity in the EU.

If achieved, the current dominance of the London financial market in this field will inevitably reduce.

Posted by Abigail Harding

Category: Clearing

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