European Commission Vice President Valdis Dombrovskis announced in a speech at the Guildhall in London last week that, ‘as the risk to financial stability has not yet been fully removed, because industry has not so far fully prepared’, he intends to renew the temporary equivalence decision for UK central counterparties (CCPs) beyond the current expiry date of 30 March 2020. No further details of the extension have as yet been published.
Article 25 of the European Market Infrastructure Regulation (EMIR) prohibits CCPs that are neither authorised nor recognised from having EEA clearing members. In November 2018, the EU announced preparations for a Brexit no-deal Contingency Action Plan which included a limited number of contingency measures that were deemed necessary on financial stability grounds in a no-deal scenario. As well as a temporary equivalence decision for UK CCPs, the measures also included provisions relating to central securities depositories and two delegated regulations facilitating novation, for a fixed period of 12 months, of certain over-the-counter derivatives contracts (for further details, see our blog post on these measures). There has been no sign from the EU, until now, that the fixed expiry date of 30 March 2020 (which has not been extended in line with the delays to the exit date) would be renewed.
The EU’s intention to renew the temporary recognition of UK CCPs is very much welcomed and removes the risk, for now, that UK CCPs will not be able to continue clearing for EU firms in a no deal scenario. Without further legal certainty on the status of UK CCPs beyond March 2020, contracts that EU members clear with UK CCPs would have needed to be closed out or transferred by the end of March 2020 – a process which would need to start before the end of 2019 and which would undoubtedly have resulted in significant cost and disruption to the market.
Andrew Bailey, Chief Executive of the FCA, had cited the uncertainties around the status of UK CCPs in a speech in September 2019 as one of the seven outstanding issues which require further action from the UK or EU and suggested that the best solution would be for the EU to grant permanent recognition to UK CCPs. Permanent recognition of UK CCPs is perhaps wishful thinking. It seems more likely that the equivalence decision promised by Mr Dombrovskis would remain time-limited and the expectation is that the Commission will extend the measure by another year, to the end of March 2021.