On 7 December 2018, several industry associations (the International Swaps and Derivatives Association, the Futures Industry Association, the Association for Financial Markets in Europe and the International Capital Markets Association) published a letter that they had jointly sent to Commissioner Valdis Dombrovskis (Vice-president for the Euro and Social Dialogue, Financial Stability, Financial Services and Capital Markets Union) welcoming the statement regarding temporary equivalence for the purpose of recognition for UK central counterparties (CCPs) in the European Commission’s communication regarding Brexit Contingency Planning published on 13 November 2018 and the statement made by the European Securities and Markets Authority (ESMA) on 23 November 2018.
Whilst welcoming the statement and communication the industry associations state that their members have identified certain areas of uncertainty that nonetheless remain.
In particular, there remain concerns that UK CCPs may deem it necessary to issue termination notices to their EEA members later this month, to ensure that those UK CCPs will not be in breach of Article 25 of the European Markets Infrastructure Regulation (EMIR) (which prohibits CCPs that are neither authorised nor recognised from having EEA clearing members) on 30 March 2019 in the event of the UK leaving the EU without agreement on a transition period. Where UK based brokers have established EU domiciled affiliates, these affiliates are in the process of applying for clearing memberships of UK CCPs. If already approved, these memberships will be subject to any termination notices, and future applications would be rejected, preventing EEA based clients which currently clear via such a broker from continuing to do so.
The industry associations also state that their EEA members also need clarity and certainty regarding the same issues in order to prudently execute their contingency plans.
The industry associations ask the Commission to provide the desired certainty by publishing its proposed temporary equivalence determination for the UK and procure that ESMA confirms that the three UK CCPs are each recognised under EMIR in the event of a no-deal Brexit.
In addition, the industry associations set out answers to the following questions and ask if the Commission could provide timely confirmation:
- Will the temporary and conditional equivalence / recognition of UK CCPs only apply to cleared derivatives or to all asset classes (including repos and cash equities) cleared via UK CCPs and what is the meaning of “extent necessary to address financial stability risks arising from a withdrawal without an agreement”? Would that mean that certain CCP services or products would not be recognised?
- The Commission refers to the UK’s proposed equivalence being temporary and conditional. Could you please clarify what conditions are proposed to be attached to such temporary equivalence?
- Will the temporary recognition cover both new and legacy transactions?
- How long will this temporary recognition regime last?
- When will the temporary recognition be proposed?
- How will the temporary recognition regime be implemented?
At the end of the letter, the industry associations also ask the Commission whether it intends to grant equivalence to UK trading venues so as to avoid the recharacterisation of UK exchange traded derivatives as over-the-counter derivatives after 29 March 2019.