ESMA Prepares for Brexit; Extends Recognition of Three UK CCPs

European investors were worried about being cut off from Britain’s financial markets in event of no-deal Brexit.

The European Securities and Markets Authority (ESMA) has published a press release announcing that it has extended the temporary equivalence and recognition of UK central counterparties (CCPs).

The three UK CCPs are LCH Limited, ICE Clear Europe Limited, and LME Clear Limited. The extended recognition would take effect on the date following the UK’s exit from the EU, under a no-deal Brexit scenario.

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European investors were worried about being cut off from Britain’s financial markets because all the other financial centers in Europe are smaller in size. In turn, the UK’s financial services sector is struggling to find a way to preserve the existing flow of trading after the nation leaves the EU.

As such, they welcomed the move as it would be vital to ensure continued access to clearing and settlement services for EEA firms and to avoid significant risk to financial stability.

ESMA initially said on February 18 that it would recognize the three central counterparties (CCPs) and one central securities depository (CSD) established in the UK. The pan-European regulator renewed its permission in April to make sure these entities are recognized in a possible cliff-edge Brexit.

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European investors worried and UK firms struggle

A recent agreement between the BOE and European Securities and Markets Authority (ESMA) also came as a relief to UK clearinghouses as they must decide whether to shift derivatives trades worth billions of euros from Britain. For instance, LCH, the LSE-controlled clearinghouse that processes around 90 percent of euro-denominated derivatives, will be outside the bloc’s legal system once Britain leaves the EU.

Without such an arrangement, clearinghouses may not get regulatory approvals, leading to operational problems such as European banks facing much higher capital charges when they use it to process their trades.

Meanwhile, the European regulators will make sure that important clearinghouses apply the bloc’s regulations and stick to policies applied by the European Central Bank.

The ESMA statement further reads:

“On 29 October 2019 the European Council took a decision in agreement with the United Kingdom to extend the period under Article 50(3) TEU. Furthermore, on 19 December 2019 the European Commission adopted Implementing Decision (EU) 2019/2211 amending Implementing Decision (EU) 2018/2031. As a result, Implementing Decision (EU) 2018/2031 is now set to expire one year after the date referred to in the second paragraph of Article 2 of that Decision. ESMA has consequently amended the recognition decisions for the three UK CCPs to extend them until this new expiry date.”

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