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#CityWeek2018: ‘Equivalence is only possible if there is close convergence of rules and supervision’ - Dombrovskis



Vice President Dombrovskis (pictured) delivered the key note address as part of ‘City Week’ (24 April), an international financial services forum in London. The EU-27 are willing to hold out the hand of friendship to the UK, but will not hesitate to withdraw it if the UK tries to create a competitive advantage through lighter regulation, writes Catherine Feore.

The issue of greatest interest to the audience will be Brexit. Dombrovskis said that while the EU-27 and UK had reached an agreement on a joint legal text that covers large parts of the future withdrawal agreement, including a transition period until 31 December 2020, important gaps in the agreement remained, including solutions for the Irish border and the governance of the withdrawal agreement. Given the uncertainty surrounding the UK’s position he advised companies and supervisors to prepare for all scenarios.

The Commission has published notices to help the industry identify the foreseeable consequences of losing the financial passport. But he said ultimate responsibility would lie with companies to identify what impact Brexit will make on their business models.

The EU is closely monitoring markets to avoid major disruption on the day of Brexit. The EU said that current discussions confirm that companies can mitigate risks by re-papering contracts and adapting operational models, this is something Dombrovskis will discuss later today (24 April) with the UK’s Chancellor of the Exchequer Philip Hammond and Governor of the Bank of England Mark Carney.

Last month, the EU-27 set out their negotiation guidelines for an overall understanding of the framework for the future relationship. Up until now, the UK and the other EU Member States have managed risks jointly by setting common rules. And the European Court of Justice has guaranteed that they are enforced against operators from all EU countries. As a result, countries are willing to accept that operators from across the EU export financial services – but also risks – into their territory, without supervising those operators themselves.

With Brexit, the UK will move away from this system. As a consequence, each side will have to set and implement its own rules to protect investors and ensure financial stability. Dombrovskis quoted Chancellor Hammond, saying: "neither side can be a simple rule taker".

Dombrovskis said that the EU has a long history of relying on the regulation and supervision of third countries, provided they achieve the same results as the EU. As of today, we have over 200 equivalence decisions benefiting more than 30 non-EU jurisdictions. No one else has a more open, comprehensive and structured framework of regulatory reliance on third countries. The vice president gave the example of equivalence decisions granted under EMIR, the EU's framework for derivatives clearing. He highlighted that the EU had extended equivalence to central counterparties in 15 non-EU jurisdictions. The EU-27 will want to build and improve equivalence when discussing the future relationship with the UK.

The EU also said that there are some clear limits to equivalence. First, equivalence decisions are and will remain unilateral and discretionary EU acts. Even in trade agreements, governments do not give up power over their core responsibility to protect financial stability. Secondly, equivalence rules do not cover all parts of the financial sector. And third, equivalence is only possible if there is close convergence of rules and supervision.

If the EU and a third country should happen to go different ways, the conditions for equivalence would fall. This means that equivalence may be changed or withdrawn. To make this less likely to occur, supervisors have to work together. Dombrovskis added that the closer the EU’s relationship is with third countries, the more intensive and regular the dialogues with them: "To sum up: equivalence is not perfect, neither for firms nor for supervisors. But we should not let perfect be the enemy of good. Equivalence has proven to be a pragmatic solution that works in many different circumstances, and it can work for the UK after Brexit as well."


Germany tells Britain to 'stop the games', time running out for deal




Germany’s Europe Minister Michael Roth (pictured) urged Britain on Tuesday (22 September) to drop plans for a bill that would break the country’s obligations to the European Union under its withdrawal treaty as time was running out to clinch an EU-Britain trade deal, writes Jan Strupczewski.

Speaking to reporters ahead of a meeting of EU ministers in Brussels that is to prepare a summit of EU leaders later this week, Roth said he was “extremely worried” by London’s plans to pass an internal market bill that would break international law.

“Please, dear friends in London, stop the games, time is running out, what we really need is a fair basis for further negotiations and we are ready for that,” Roth said. The bill is expected to pass through the lower chamber of parliament next week and has thrown talks on a trade agreement between Britain and the EU into chaos as it undermines Britain’s willingness to honour international deals.

“The so-called internal market bill extremely worries us because it violates the guiding principles of the withdrawal agreement. And that is totally unacceptable for us,” Roth said.

He said the EU was “really, really disappointed” about the results of the trade negotiations, which have become stuck on the issue of EU fishermen’s access to British waters, fair competition between EU and British companies and a mechanism to resolve disputes in the future. Roth said EU ministers on Tuesday would state their strong support for the EU’s chief Brexit negotiator Michel Barnier and his team and re-affirm a strong commitment to a fair trade deal based on trust and confidence.

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



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.”


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.

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EU's Barnier still hopes trade deal with Britain possible, sources say




The European Union’s Brexit negotiator told the bloc’s 27 national envoys to Brussels that he still hoped a trade deal with Britain was possible, stressing that the coming days would be decisive, diplomatic sources with the bloc told Reuters, write and

Michel Barnier addressed the gathering on Wednesday (16 September) and the three sources either participated in the discussion behind closed doors or were briefed on its content.

“Barnier still believes a deal is possible though the next days are key,” said one of the EU diplomatic sources.

A second diplomat, asked what Barnier said on Wednesday and whether there was still a chance for a new agreement with the UK, said: “The hope is still there.”

The first source said tentative concessions offered by the UK on fisheries - a key point of discord that has so far prevented agreement on a new EU-UK trade deal to kick in from 2021 - were “a glimmer of hope”.

Reuters reported exclusively on Tuesday (15 September) that Britain has moved to break the deadlock despite that fact that publicly London has been threatening to breach the terms of its earlier divorce deal with the bloc.

A third source, a senior EU diplomat, confirmed the UK offer but stressed it was not going far enough for the bloc to accept.

Brexit talks descended into fresh turmoil this month over Prime Minister Boris Johnson’s plans to pass new domestic laws that would undercut London’s earlier EU divorce deal, which is also aimed at protecting peace on the island of Ireland.

US Democratic presidential candidate Joe Biden warned Britain that it must honour the Northern Irish peace deal as it extracts itself from the EU or there would be no US trade deal for the United Kingdom.

The third EU source, who spoke under condition of anonymity, said that the bloc would take a more rigid line in demanding a solid dispute settlement mechanism in any new UK trade deal should Johnson press ahead with the Internal Market Bill.

“There is unease about what Britain is doing but Barnier has stressed he will keep negotiating until his last breath,” said a fourth EU diplomat, highlighting the bloc’s wariness about being assigned blame should the troubled process eventually fail.

Asked about an estimate by Societe Generale bank, which put at 80% the probability of the most damaging economic split at the end of the year without a new deal to carry forward trade and business ties between the EU and the UK, the person said:

“I would put it around the same mark.”

Barnier is due to meet his UK counterpart, David Frost, around 1400 GMT in Brussels on Thursday.

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