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Brexit - European Commission gives market participants 18 months to reduce their exposure to UK clearing operations

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The European Commission has today (21 September) adopted a time-limited decision to give financial market participants 18 months to reduce their exposure to UK central counterparties (CCPs). The deadline is the clearest sign that the EU intends to move the 'clearing' business out of London and into the eurozone.

The move will come as a blow to London, which is the current world leader in clearing a business worth several billion. The London Clearing House (LCH), clears nearly a trillion euro-worth of euro-denominated contracts a day, and accounts for three-quarters of the global market. Clearing offers a way of mediating between buyers and sellers, it is thought by having a larger clearing business the costs of transactions are reduced. When the European Central Bank in Frankfurt tried to insist that all euro trades were done inside the eurozone this was challenged successfully in the European Court of Justice by George Osborne, then the UK Chancellor of the Exchequer.

In the past the London Stock Exchange has warned that up to 83,000 jobs could be lost if this business were to move elsewhere. There would also be spillovers to other areas such as risk management and compliance.

An Economy that Works for People Executive Vice President Valdis Dombrovskis (pictured) said: “Clearing houses, or CCPs, play a systemic role in our financial system. We are adopting this decision to protect our financial stability, which is one of our key priorities. This time-limited decision has a very practical rationale, because it gives EU market participants the time they need to reduce their excessive exposures to UK-based CCPs, and EU CCPs the time to build up their clearing capability. Exposures will be more balanced as a result. It is a matter of financial stability.”

Background

A CCP is an entity that reduces systemic risk and enhances financial stability by standing between the two counterparties in a derivatives contract (i.e. acting as buyer to the seller and seller to the buyer of risk). A CCP's main purpose is to manage the risk that could arise if one of the counterparties defaults on the deal. Central clearing is key for financial stability by mitigating credit risk for financial firms, reducing contagion risks in the financial sector, and increasing market transparency.

The heavy reliance of the EU financial system on services provided by UK-based CCPs raises important issues related to financial stability and requires the scaling down of EU exposures to these infrastructures. Accordingly, industry is strongly encouraged to work together in developing strategies that will reduce their reliance on UK CCPs that are systemically important for the Union. On 1 January 2021, the UK will leave the Single Market.

Today's temporary equivalence decision aims to protect financial stability in the EU and give market participants the time needed to reduce their exposure to UK CCPs. On the basis of an analysis conducted with the European Central Bank, the Single Resolution Board and the European Supervisory Authorities, the Commission identified that financial stability risks could arise in the area of central clearing of derivatives through CCPs established in the United Kingdom (UK CCPs) should there be a sudden disruption in the services they offer to EU market participants.

This was addressed in the Commission Communication of 9 July 2020, where market participants were recommended to prepare for all scenarios, including where there will be no further equivalence decision in this area.

Brexit

Brexit: ‘Frankly, I cannot tell you if there will be a deal’ von der Leyen 

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Addressing the European Parliament this morning (25 November) European Commission President Ursula von der Leyen said that she couldn’t say whether the EU would be able to reach a deal with the UK on its future relationship before the end of the year. She said the EU side was willing to be creative, but that it would not put the integrity of the Single Market in question. 

While there has been genuine progress on a number of important questions, such as law enforcement, judicial co-operation, social security coordination and transport, von der Leyen said that the three ‘crucial’ topics of level playing field, governance and fisheries remained to be resolved.

The EU is seeking robust mechanisms to ensure that competition with the UK remains free and fair over time. This is not something that the EU can skate over, given its proximity and the scale of existing trade ties and integration in EU supply chains. The UK has to date been ambiguous about how it would deviate from European norms that it played no small role in shaping, but the logic of Brexit supporters is that the UK could become more competitive through deregulation; a point of view that obviously makes some EU partners a little ill at ease.

‘Trust is good, but law is better’

The need for clear legal commitments and remedies has become starker following the UK’s decision to introduce an Internal Market Bill that includes provisions that would allow it to deviate from parts of the Ireland/Northern Ireland Protocol. Von der Leyen said that strong governance was essential in "the light of recent experience".

Fisheries

On fisheries, von der Leyen said that no-one questioned the UK’s sovereignty of its own waters, but held that the EU needed "predictability and guarantees for fishermen and fisherwomen who have been sailing in these waters for decades, if not centuries".

Von der Leyen thanked the parliament for their support and understanding in the difficulties such a late agreement presented to them. A final deal will be several hundred pages long and need to be legally scrubbed and translators; this is unlikely to be ready by the next plenary session of the European Parliament in mid-December. It is generally acknowledged that if a deal is to be arrived at a plenary on 28 December will be needed. Von der Leyen said: “We will walk those last miles together.”

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UK will remain global leader for asset management after Brexit: Sunak

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British Finance Minister Rishi Sunak (pictured) said on Tuesday (24 November) that he was determined that the United Kingdom would remain a global leader for asset management after Brexit, writes William Schomberg.

“We’re beginning a new relationship with the EU. And as we do so, we are determined that the UK will remain a global leader for asset management,” Sunak said in comments to a conference organized by The Investment Association, an industry group.

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Irish PM hopeful of Brexit trade deal outline by end of week

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Irish Prime Minister Micheal Martin said on Monday (23 November) that he hoped that the outline of a Brexit free trade deal will have emerged by the end of the week and urged unprepared smaller Irish exporters to get ready for change, whether there is a deal or no deal. The European Union’s Brexit negotiator said on Monday that big differences persisted but that both sides were pushing hard for a deal, as talks resumed, writes Padraic Halpin.

Moves will have to be made on some of the key issues such as fisheries and the so-called “level playing field”, Martin said. But he added that he had got a sense of progress from both negotiating teams, and that a presentation last week from EU Commission President Ursula von der Leyen was probably one of the more hopeful to date.

“I would be hopeful that, by the end of this week, that we could see the outlines of a deal, but that remains to be seen. It is down to political will, both in the United Kingdom and I’m clear the political will is there from the European Union,” Martin told reporters.

On a visit to Dublin port, Ireland’s largest freight and passenger port, Martin said that, while 94% of Irish importers from the UK and 97% of exporters had completed the necessary customs paperwork to continue trading with Britain, he was worried by the take-up among some small and medium-sized firms.

“The one concern I’d have is maybe there is a complacency among some SMEs out there that everything will be OK and ‘Sure if they get a deal, won’t it be OK?’. It will be different, and you have to get that into your heads,” Martin said. “The world will change and it will not be as seamless as it once was. The bottom line is you need to get ready. It is not too late, people just need to knuckle down now.”

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