The European Securities and Markets Authority (ESMA) announced this Friday that it is working towards ensuring access to Central Counterparty Clearings (CCPs) in the United Kingdom for European financial institutions post-Brexit.
With the Brexit deadline just months around the corner, market participants are increasingly preparing for a so-called “hard Brexit” were a no-deal situation occurs. To avoid market disruption in the case of a no-deal situation, together, with the European Commission, the regulator is planning actions to establish a recognition process of UK CCPs.
In a public statement today, the European watchdog announced that it has already begun engaging with UK CCPs, with the aim of the preparatory work to ensure EU clearing members and trading venues have continued access to UK CCPs after the UK leaves the bloc.
However, this continued access, as the regulator points out, depends on all of the conditions in European Market Infrastructure Regulation (EMIR), including any conditions set out in the equivalence decision, being fulfilled.
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ESMA also references and states its support for a report from the European Commission Preparing for the withdrawal of the United Kingdom from the European Union on 30 March 2019: a Contingency Action Plan which was published on November 13, 2018.
In the report, the European Commission has said that in the instance of a hard-Brexit it will adopt a temporary and conditional equivalence decision, which will ensure there is no disruption to central clearing.
The Importance of CCPs
CCPs are financial institutions that reduce the counterparty, operational, settlement, market, legal and default risk for traders. This is because the entity becomes the counterparty to the buyer and seller, guaranteeing the terms of a trade even if one party pulls out of the agreement. These type of financial institutions play a key role in maintaining financial stability in their respective markets.
As the International Monetary Fund highlighted in a working paper: “the increased volumes cleared through CCPs and their increasing global scope, in particular in the OTC derivatives market, make it even more important that systemic risks related to CCPs are managed.”