On September 21, the European Commission (Commission) adopted a time-limited decision to provide financial market participants 18 months within which they should reduce their exposure to UK central counterparties (CCPs) (the Decision).

The 18-month temporary equivalence Decision aims to facilitate the challenges created by the UK’s withdrawal from the Single Market (i.e., Brexit). This period enables EU clearing members to develop strategies and strengthen their clearing capability to reduce their reliance on UK CCPs.

From January 1, 2021, UK CCPs will be considered “third-country CCPs” within the meaning of Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR). A UK CCP will be unable to provide clearing services within the EU unless the European Securities and Markets Authority (ESMA) has recognized the UK CCP, which first requires the Commission to have determined that:

  1. the legal and supervisory arrangements governing the UK CCP are equivalent to those of EMIR; and
  2. the UK CCP is systemically important for the financial stability of the EU.

Considering the first requirement and based on the available information on UK CCPs, the UK’s legal and supervisory framework will be in line with EMIR after January 1, 2021. Where changes have been made, the UK is expected to inform the Commission. The Commission, in cooperation with ESMA, will monitor the UK’s legal and supervisory framework and reserve the right to amend, suspend, review or revoke their Decision.

Considering the second requirement, the 18-month Decision provides ESMA with time to conduct a comprehensive review of the systemic importance of UK CCPs and their clearing services or activities in the EU from January 1, 2021 onwards. Once a review has been made, ESMA will recommend to the Commission on whether a UK CCP should be recognized or not.

The Decision is available here.