Thirty Sixth Report Contents

Appendix 2: Central Counterparties (Equivalence) Regulations 2020 (SI 2020/1244)

Additional information from HM Treasury

Q1: Has the EU also taken a decision that the UK will be regarded as having an equivalent legal and supervisory framework for CCPs after the end of the Transition Period?

A1: [HMT] can confirm that the EU had also taken a decision that the UK will be regarded as having an equivalent legal and supervisory framework for CCPs after the end of the Transition Period.

The EU had made a series of decisions, the effect of which permit UK CCPs to provide clearing services to the EU. These are as follows: on 21 September, the European Commission adopted a time-limited equivalence decision for 18 months from January 2021 determining that the regulatory and supervisory framework applicable to UK CCPs is equivalent; following this, the Bank of England and the European Securities and Market Authority (ESMA) agreed a new Memorandum of Understanding (MoU), agreeing the necessary arrangements for the supervision of UK CCPs under EMIR 2.2; and finally, on 28 September ESMA also completed the recognition of all three UK CCPs.

13 November 2020

Q2: Is the EU’s recognition of the three UK CCPs limited to 18 months?

A2: Recognition is dependent on an equivalence decision being in force and the EU’s equivalence decision will expire at the end of June 2022, 18 months after the end of the Transition Period.

Under EMIR, it is for ESMA to decide how to manage the process at the end of the 18-month period and if necessary the wind down of activity. This process could go beyond the current 18th month time-limit for equivalence.

Q3: How significant is equivalence in this area?

A3: Equivalence is a unilateral process and therefore decisions are made autonomously by the UK and the EU.

Our decision allows UK businesses and trading venues to continue to use the clearing services of EEA CCPs, replacing the recognition decision by the Bank of England under the UK’s Temporary Recognition Regime.

The EU’s decision applies to EU firms wanting to use UK CCPs. There are only three CCPs operating in the United Kingdom - London Clearing House (LCH) Limited, ICE Clear Europe and London Metal Exchange (LME) Clear. The EU’s equivalence, and subsequent tiering and recognition decisions, therefore apply to all UK CCPs.

UK CCPs are globally systemic and provide a large volume of services to EU clients. LCH, for example, accounts for over 93% of the global market for cleared interest rate swaps. It is the largest CCP in Europe and one of the largest globally.

Q4: Is this an isolated decision or have there been other equivalence decisions in other areas of financial services?

A4: The EU have granted the UK a handful of decisions outside of CCPs, which give exemptions to the Bank of England and other UK public bodies.

The UK granted its first set of decisions to the EU in April 2019 covering exemptions for EU central banks and public bodies and also under the prospectus and transparency directives.

On 10 Nov, the UK granted a package of equivalence decisions to the EEA States, including EU Member States. To provide clarity and stability to industry and reflecting the Government’s commitment to be as open as possible, HM Treasury announced as many decisions as we can in advance of the end of the Transition Period, as provided for under the agreement on the UK’s withdrawal from the EU (the Transition Period) on 31 December 2020. Granting these equivalence decisions provides a range of benefits, including supporting well-regulated open markets, facilitating effective pooling and management of risk, and supporting UK and EEA clients’ access to financial services and market liquidity. This statutory instrument is an important part of that package.

24 November 2020

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