EU urged to extend UK clearing house decision

Nine industry associations representing a broad group of financial market participants have written to European Commissioner Mairead McGuinness requesting an extension of the EC equivalence decision for UK central clearing counterparties (CCPs).

Equivalence is set to expire on June 30, 2022 and the associations have asked the EC to provide clarity well in advance of March 2022 “in order to prevent negative financial, commercial, operational and level playing field effects on EU counterparties and clearing members and to enable continued access to global pools of liquidity after 30 June 2022.”

The UK fully left the EU last December and the London Stock Exchange, whose LCH SwapClear arm clears the bulk of swaps denominated in euros, currently has temporary permission to continue serving customers from the EU until June 30 next year.

The EU is putting pressure on banks to move activity worth trillions of euros to Deutsche Boerse’s Eurex arm in Frankfurt.

The joint letter was signed by nine industry associations including the International Swaps and Derivatives Association, the Association for Financial Markets in Europe, the European Banking Federation, the Futures Industry Association, the European Association of Public Bank, the European Banking Federation, European investment management industry body EFAMA, and ICI Global, the international arm of the Investment Company Institute.

Clearinghouses like the London Stock Exchange Group’s LCH operate at the center of financial markets.

The letter read: “If the current time-limited equivalence decision for UK CCPs is allowed to lapse at the end of June 2022, there is a significant risk of market disruption for EU clearing members and their clients.

“Market participants have carried out a huge amount of work since June 2016 to prepare for the UK’s departure from the EU, including setting up new EU clearing units, re-papering EU clients and re-organising their access to EU and UK trading venues, CCPs and other market infrastructure.

“However, there are a number of factors that limit their ability to prepare for the expiry of the current time-limited equivalence decision for UK CCPs at the end of June 2022, including the fact that the range and depth of clearing services offered by the UK CCPs is still not replicated in the EU5.

“This means that there are certain products that cannot currently be cleared at all outside of UK CCPs, and even where products can be cleared through EU CCPs, there is not always sufficient liquidity meaning that the financial stability risks involved with this activity will be increased (as risks are mutualised among a smaller number of clearing members).

“It is also worth noting that the location of clearing is driven by commercial factors including client demand, so moving clearing to EU CCPs is not entirely within the control of the EU clearing members.

“However, we would also note that based on publicly available data we are starting to see a natural, gradual shift of activity to EU CCPs and we would welcome an extension to the current time-limited equivalence decision to allow this natural, market-led shift to continue and also to allow EU CCPs to continue to develop their offering.

“Based on publicly available information from LCH and Eurex … just over the period from 1 April – 1 July 2021 Eurex’s market share for euro denominated IRS (interest rate swaps) has increased at a rate of around 0.5% per month, while LCH’s share has decreased by a similar amount …”

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