European Commission extends time-limited equivalence for UK CCPs

The European Commission has today adopted a decision to extend equivalence for UK central counterparties (CCPs) until 30 June 2025. This decision will ensure the European Union’s financial stability in the short-term.

In addition, the Commission has also launched today a targeted public consultation and a call for evidence on ways to expand central clearing activities in the EU and improve the attractiveness of EU CCPs in order to reduce the EU’s overreliance on systemic third-country CCPs. The aim of this consultation is also to seek stakeholders’ views on changes to supervisory arrangements for EU CCPs.

In the second half of 2022, the Commission intends to come forward with measures to develop central clearing activities in the EU. First, the aim is to build domestic capacity, making the EU a more competitive and cost-efficient clearing hub and to enhance EU CCP’s liquidity. Secondly, it is essential that risks are appropriately managed and the EU’s supervisory framework for CCPs is strengthened, including a stronger role for EU-level supervision.

This proposed way forward strikes a balance between preserving EU financial stability in the short term and building a strong and competitive Capital Markets Union in the coming years.

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.

In the long run, the heavy reliance of the EU financial system on services provided by UK-based CCPs could raise important issues related to financial stability.

In September 2020, the Commission adopted a time-limited equivalence decision for UK CCPs until 30 June 2022 to avoid any possible financial stability risks. In this equivalence decision, market participants were urged to take action and reduce their exposures to UK CCPs.

Over the course of 2021, the Commission established a Working Group (together with the European Central Bank, the European Supervisory Authorities and the European Systemic Risk Board) to explore the opportunities and challenges involved in transferring derivatives from the UK to the EU.

The discussions at the Working Group showed that a combination of different measures to improve the attractiveness of clearing, to encourage infrastructure development, and to reform supervisory arrangements were needed to build strong and attractive central clearing capacity in the EU in the years to come.

The timeframe of June 2022 was too short to achieve this. Therefore, today’s extension decision was necessary.