On 5 June 2018, the FIA published the results on its survey into clearing brokers’ progress with their Brexit contingency plans, the issues they face when structuring and executing such plans, and the policy proposals that would help address those issues.

The FIA reports that the primary concern expressed by a number of EU27 clearing firms is that they may be forced to close some or all of their client clearing business if UK central counterparties (CCPs): (i) are not recognised under the European Market Infrastructure Regulation (EMIR) and/or; (ii) fail to retain their qualifying CCP (QCCP) status under the Capital Requirements Regulation (CRR).

The FIA also reports that in light of the PRA statements on the UK’s withdrawal from the EU in December 2017 and March 2018, which indicated that, for at least a temporary period, the UK would not prohibit UK firms from membership of EU27 CCPs, most firms are comfortable about being able to continue to access EU27 market infrastructure from the UK. However, in the absence of reciprocal confirmation by the European Commission, such access is not currently so certain from an EU perspective. One clearing firm has indicated to the FIA that they will cease providing access to EU27 CCPs for clients if they are unable to do so from the UK post-Brexit. Failure to retain current levels of access between the UK and EU27 would have a significant negative impact on two of the Commission’s key post-financial crisis policy objectives: access to clearing and the recoverability of CCPs.

Key findings also include:

  • firms are not willing to restructure their business at any cost. If contingency plans are uneconomic, they may either cease servicing certain clients, providing access to certain financial market infrastructures and/or close entire business lines;
  • many firms anticipate fragmenting their client relationships across their UK and EU affiliates, by client jurisdiction and/or by product;
  • the number of indirect clearing relationships will increase significantly for listed derivatives with respect to EU27 clients clearing on EU27 CCPs due to the use of routing trades via a clearing broker in the UK;
  • however, direct clearing via an EU clearing member will continue to be the norm for cleared over-the-counter derivatives that are cleared in an EU27 CCP for EU27 clients;
  • almost all clearing brokers propose to service their EU27 clients from an EU27 affiliate, rather than their UK affiliate;
  • so far there has not been a meaningful shift in client clearing from UK CCPs to EU CCPs; and
  • there is significant uncertainty as to how certain EU regimes will operate in practice in the UK post-Brexit.

The FIA urges  UK and EU policy makers to consider the following steps:

  • the Commission confirms whether, and from when, UK firms may be permitted to benefit from the third country passport under Articles 46/47 of the Markets in Financial Instruments Regulation;
  • the Commission confirms whether, and from when, UK CCPs will be capable of recognition under EMIR;
  • the Commission confirms that UK CCPs will retain their QCCP status under the CRR;
  • the Commission confirms whether EU27 CCPs will be able to continue to service UK clearing members and clients;
  • the UK and EU27 each confirm whether the UK will continue to participate in the EU Emissions Trading Scheme during the Brexit transition period and whether the UK will adopt a domestic version of the scheme thereafter; and
  • the UK confirms whether and when it will implement a domestic version of the EU Regulation on Wholesale Energy Market Integrity.