No-deal Brexit and CCPs and CSDs 26 February 2019

Banking and finance, Capital markets

In preparation for a no-deal Brexit, the European Commission adopted a package of measures regarding the financial sector.

In the absence of the recognition of UK CCPs, counterparties established in the European Union may not clear transactions that are subject to clearing obligation under EU law. That situation may result in temporary challenges for those counterparties to fulfil their clearing obligations, which in turn, may pose risks to the financial stability. A similar problem arises with relation to the UK CSDs. In the absence of the recognition of UK CSDs, EU issuers may not use UK CSDs to record transferable securities in a book-entry form required by EU law.

To avoid these problems, the European Commission issued two temporary and conditional equivalence decisions. In accordance with these decisions, the UK CCPs and the UK CSDs may provide services pursuant to the EU law even after 30 March 2019 for a period of 12 months in case of CCPs and 24 months in case of CSDs months, as long as legal and supervisory arrangements of the UK applicable to such entities are maintained and continue to be effectively applied and enforced on an ongoing basis.

The other leg of the measures taken by the Commission concerns certain OTC derivative contracts not falling under clearing obligation or requirements of risk management procedures.

In order to ensure the smooth functioning of the market and a level playing field between counterparties established in the European Union, counterparties should be able to replace counterparties established in the United Kingdom with counterparties in a Member State without being required to exchange collateral in respect of those novated contracts.

The same problem arises in relation to clearing obligations. If, due to the withdrawal of the UK from the EU, the parties decide to replace a counterparty established in the UK with a new counterparty established in the EU, the novation of the contracts will trigger the clearing obligation. As a result, the parties will have to clear that contract in an authorised or recognised CCP. Centrally cleared contracts are subject to a different collateral regime than non-centrally cleared contracts. The triggering of the clearing obligation may thus force certain counterparties to discontinue their transactions, leaving certain risks unhedged.

The Commission accordingly extended the current exemptions for a fixed period of 12 months thus ensuring the smooth functioning of the market and a level playing field between counterparties established in the Union.

Brexit, Settlement

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