Earlier today, the European Securities and Markets Authority
(ESMA) announced that it is ready to review UK central
counterparties’ (CCPs) and central securities depositories’
(CSDs) applications for equivalence recognition.
CCPs act between the buyer and seller of every trade on one or
more financial market, becoming the buyer to every seller and the
seller to every buyer.
CSDs are institutions that hold financial instruments. They allow
ownership of those instruments to be transferred in electronic
form through updating electronic records which are often known as
‘book-entry records’.
CCPs and CSDs will be granted equivalence for 12 months, meaning
that the EU and the UK will recognise one another’s standards, in
the result of a no-deal Brexit.
Commenting on the announcement, Rt Hon. MP, Chair of the Treasury,
said:
“ESMA’s announcement is welcome news. As the Bank of England has
said, Recognition would allow UK CCPs to continue to provide
clearing services to their EU members, and EU banks to meet their
obligations to UK CCPs.
“By agreeing to grant temporary equivalence for UK CCPs and UK
CSDs, one more risk of a no-deal Brexit has been taken off the
table.
“As the Committee concluded in its report on transitional
arrangements last year, it is overwhelmingly in the economic
interests of both the UK and the EU to reach an agreement on
transition. A sudden reversion to a trade relationship based on
WTO commitments would be damaging for both sides.”
Notes to Editors
ESMAs announcement is here.
The Bank of England’s statement, welcoming the announcement, is
here.
Such equivalence recognition will only be needed in a no deal
scenario. Were a deal to be agreed, the Transition Period would
provide CCPs and CSD’s with access to EU markets.
The Treasury Committee’s report on transitional arrangements for
exiting the EU, published on 14 December 2017,
Were the UK to trade with the EU solely on the basis of WTO
commitments, this would place it in an unusual position. Most
advanced economies—even those without a preferential trade
agreement covering tariffs—have arrangements with the EU that go
some way to addressing the non-tariff barriers to trade that
exist under WTO-only arrangements. For instance, the United
States has agreements with the EU on (among other things) customs
co-operation, and the mutual recognition of conformity assessment
procedures for certain goods. An equivalence determination by the
European Commission made in February 2016 also allows central
counterparties (CCPs) based in the US to serve EU clients on the
same basis as CCPs based in the EU. Sir Ivan Rogers said that, in
such a scenario:
We have no more rights than Venezuela or Yemen in the EU market.
We have no more rights of access, because we have got no
preferential agreement and we have got no legal agreement.
[…]
As with other sectors, the potential disruption arising from a
‘no-deal’ scenario stands to affect both the UK and the EU. Dr
Carney told the Committee that, given the dominance of the UK as
a financial services provider to the rest of the EU, “these
issues are bigger for Europe than they are for us, although they
are material for us”. He has also commented on the extent of
reliance of the EU27 on UK financial services: Banks located in
the UK supply over half of debt and equity issuance by
continental firms, and account for over three quarters of foreign
exchange and derivatives activity in the EU. If these UK-based
firms have to adjust their activities in a short time frame,
there could be a greater risk of disruption to services provided
to the European real economy, some of which could spill back to
the UK economy through trade and financial linkages.
The Bank has also noted that UK-incorporated companies provide
around half of wholesale banking services used by EEA customers.
And the ECB estimates that UK central counterparties (CCPs) clear
approximately 90 per cent of euro-denominated interest rate swaps
used by euro-area banks.
