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ESMA moves on UK clearing house recognition in case of cliff-edge Brexit

The EU financial markets watchdog is taking steps to ensure rule-abiding EU firms can continue to clear derivatives through London if no deal is agreed on the UK’s exit from the bloc.

The European Securities and Markets Authority (ESMA) today said it was working with the European Commission to plan for the recognition of UK clearing houses in case of a “no-deal scenario”.

It had already started engaging with UK central counterparties (CCPs) to carry out the preparatory work, it said.

Last week the European Commission said it would adopt a “temporary and conditional equivalence decision” to prevent disruption to central clearing and address financial stability risks arising from a no-deal situation.

These decisions would be complemented by the recognition of UK-based “infrastructures”, which the Commission encouraged to pre-apply for ESMA for recognition.

UK CCPs would need to comply with EMIR and any conditions set out in the equivalence decisions to be recognised by the EU watchdog.

The European Central Bank has estimated that 90% of euro-denominated interest rate swaps used by euro-area parties are cleared by UK-based CCPs. The Bank of England has put at around £67trn (€76trn) the notional amount of outstanding over-the-counter derivatives that could be affected if the UK leaves the EU without a deal.

AFME, the lobbying group representing investment banks in Europe, welcomed the Commission’s and ESMA’s statements, but said more clarity and certainty needed to be provided “as a matter of urgency”.

EU and UK negotiators have reached draft agreements on the UK’s withdrawal from and subsequent relations with the EU, but there are still several hurdles to be cleared to conclude a final deal. EU leaders are due to meet on Sunday to sign off on a draft agreement.

Equivalence if a deal is reached

The UK’s asset management trade body, meanwhile, has said the draft political declaration on post-Brexit UK-EU relations, published yesterday, provided “additional certainty”.

“We are reassured by the aspiration for decisions on equivalence to be taken before the end of June 2020 and in a co-operative manner, which will help UK savers and investors to continue to find opportunities across the EU after Brexit,” said Chris Cummings, chief executive of the Investment Association. “The focus must now be on ensuring this access is fair, transparent, and reliable.”

The end goal, added Cummings, was a final agreement that allowed the asset management industry “to work seamlessly across borders”.

The draft political declaration is a high-level document. On financial services, it states that cooperation on regulatory and supervisory matters should be “based on the principles of regulatory autonomy, transparency and stability”.

“It should include transparency and appropriate consultation in the process of adoption, suspension and withdrawal of equivalence decisions, information exchange and consultation on regulatory initiatives and other issues of mutual interest, at both political and technical levels,” it adds.

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