ESMA Brexit Preparations – Recognition of Three CCPs Extended

ESMA (European Securities and Markets Authority) has extended the recognition decisions of the three central counterparties (CCP) established in the United Kingdom (UK). What is the current stage of the ESMA Brexit preparations?

24 December, 2019 | AtoZ Markets – ESMA has announced in a press release that it has extended the temporary equivalence and recognition in the United Kingdom. It reflects the extension of the expiry date of the Implementing Decision (EU) 2018/2031 on the equivalence of the UK CCP legal framework of the European Commission.

ESMA Brexit Preparations are Taking Shape with Three UK CCPs

ESMA extends recognition decisions for 3 UK CCPs in the event of a no-deal Brexit. The UK’s three central counterparties are:

  1. LCH Limited
  2. ICE Clear Europe Limited 
  3. LME Clear Limited

The extended recognition would take effect on the date following the UK’s exit from the EU, in the context of a no-deal Brexit scenario. However, European investors feared being cut off from the British financial markets because all the other financial centers in Europe are smaller. The UK financial service sector is also struggling to find a way to preserve the trade flow after the country leaves the EU.

As such, they welcomed this initiative. It would be vital to guarantee EEA businesses continuous access to clearing and settlement services. And it would avoid any significant risk to financial stability.

ESMA initially declared on 18 February that it would recognize the three central counterparties (CCPs). And one central securities depository (CSD) established in the United Kingdom. The pan-European regulator renewed its authorization in April. It wants to ensure that these entities are recognized in a possible Brexit on the cliff.

ESMA statement reads as follows:

“On 29 October 2019, the European Council took a decision in agreement with the United Kingdom to increase the period under Article 50 (3) of the TEU. Besides, on 19 December 2019, the European Commission adopted implementing decision (EU) 2019/2211 amending implementing decision (EU) 2018/2031. Consequently, implementing decision (EU) 2018/2031 will expire one year after the date referred to in the second section of Article 2 of that decision. ESMA has therefore modified the recognition decisions of the three British CCPs to extend them until this new expiry date “.

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An Agreement between the BOE and the ESMA

A recent agreement between the BOE and the European Financial Markets Authority (ESMA) has also relieved British clearing houses. However, they have to decide whether to transfer multi-billion euros derivative trades from Britain. For example, LCH, the LSE-controlled clearinghouse processes around 90 percent of euro-denominated derivatives. It will be outside the bloc’s legal system once Britain leaves the EU.

Without such an arrangement, clearing houses may not obtain regulatory approvals. That would cause operational problems. European banks were facing much higher capital charges when they were using it to process their transactions.

Meanwhile, European regulators will ensure that major clearing houses enforce block regulations. And they stick to policies applied by the European Central Bank.

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