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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

UK will not back down on fisheries policy in EU talks: Gove

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Britain will not back down on its demands to the European Union over fisheries, minister Michael Gove said in a 26 October letter sent to a minister in the devolved Welsh government, writes William James.

Responding to concerns set out by Jeremy Miles, Wales’s Minister for European Transition, Gove wrote: “I am afraid we strongly disagree with your premise that we should ‘back down’ on fisheries.

“The UK government’s view is that in all circumstances, the UK must be an independent coastal state, no longer be bound by the Common Fisheries Policy.”

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Brexit decision entirely separate from US election outcome says PM Johnson

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Britain’s decision on whether to agree a Brexit deal with the European Union is entirely separate to the outcome of the US election next month, Prime Minister Boris Johnson said on Monday (26 October), writes William James.

“The two things are entirely separate,” Johnson said, when asked about an Observer newspaper report that he was waiting to see the US result before making a Brexit decision, and whether he was concerned about the prospect of a Joe Biden presidency.

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'Time is very short' Britain says as EU's Barnier heads to London

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Britain said on Monday (26 October) that time was very short to bridge the significant remaining gaps on key issues in talks with the European Union, as EU chief negotiator Michel Barnier heads to London to continue negotiations, write and

The United Kingdom left the European Union in January but the two sides are trying to clinch a deal that would govern nearly a trillion dollars in annual trade before a transition period of informal membership ends on 31 December.

After a brief hiatus when London walked away from the negotiating table, both sides are now meeting daily to try to find common ground.

At stake is the smooth flow of cross-border trade as well as the harder-to-quantify damage that a chaotic exit would do to areas such as security information sharing and research and development cooperation.

“There is much work to be done if we’re going to bridge what are the significant gaps that remain between our positions in the most difficult areas and time is very short,” Johnson’s spokesman said.

Barnier and his EU team will be in London until Wednesday, after which talks will switch to Brussels and continue through the weekend, an EU spokesperson said.

EU diplomats were not expected to be briefed on progress in the latest batch of talks until later in the week.

Johnson told reporters he was very glad to be talking with the EU again, but offered no new clues on the likelihood of a deal: “We’ll see where we go.”

Since talks restarted last week, British ministers have said real progress has been made and that there is a good chance of a deal. On Sunday, Ireland’s deputy prime minister, Leo Varadkar, said a deal to avoid tariffs and quotas was likely.

After some progress on competition guarantees including state aid rules, the hardest issue remains fishing - Johnson has insisted on taking back control over Britain’s waters while the EU wants access.

Although Britain insists it can prosper without a deal, British companies are facing a wall of bureaucracy that threatens chaos at the border if they want to sell into the world’s biggest trading bloc when life after Brexit begins on 1 January.

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