Given the continuing uncertainty surrounding the United Kingdom’s (the “UK”) departure from the European Union (“EU”), regulators and institutions on both sides of the channel have taken a range of initiatives in order to counteract the most dramatic consequences of the UK’s departure from the EU without a withdrawal agreement and implementation period (“no deal Brexit”).
In this context, the European Securities and Markets Authority (“ESMA”) has been involved in a number of initiatives to ensure market stability and investor protection in case such a no deal scenario occurs.
For instance, in February, ESMA and the Bank of England announced that they had agreed Memoranda of Understanding (“MoUs”) which will allow, among other things, post-Brexit portfolio management delegation for UK asset managers.[1]
CLEARING HOUSES AND BREXIT
One sector where the impact of a no deal Brexit could be particularly severe is the clearing of derivatives products and central repositories. For a full analysis of the impact of Brexit on derivatives, please click on the following link to see our previous newsletter: “Impact of Brexit on Financial Services”
Clearing houses, or Central Clearing Counterparties (“CCPs”), are largely run by exchanges, sit between parties in a deal and manage the impact to the market if one side defaults. London and its three clearing houses — LCH, ICE Clear Europe and LME Clear — are at the heart of the clearing business, and process more than $450tn in interest-rate, credit, forex and metals-related swaps from around the world.
EU law states that members such as banks must use authorised central counterparties to clear derivatives and interest-rate swaps. Without access to CCPs, participants face a hefty rise in trading costs — or an inability to hedge their market exposures. It is estimated that as much as £41tn of derivatives contracts maturing after Brexit are at risk unless European officials address regulatory uncertainty.
ESMA RECOGNISES THREE UK CCPs
ESMA has previously communicated, in its statements of 23 November, 19 December 2018 and 4 February 2019, that its Board of Supervisors supports continued access to UK CCPs.
In February, ESMA announced that in the event of a no-deal Brexit, the three CCPs established in the UK, LCH Limited, ICE Clear Europe Limited and LME Clear Limited, will be recognised to provide their services in the EU.
After assessing the applications and the information submitted by the three CCPs, and consulting with the relevant authorities in accordance with EMIR, ESMA has stated that the three CCPS meet the conditions for recognition under Article 25 of EMIR in case of a no-deal Brexit. ESMA has adopted these recognition decisions in order to limit the risk of disruption in central clearing and to avoid any negative impact on the financial stability of the EU.
Therefore, it has adopted decisions to recognise these three CCPs as third country CCPs under EMIR.
If a no-deal Brexit scenario occurs, the recognition decisions would take effect on the date following the day after a no deal Brexit.
CENTRAL SECURITIES DEPOSITORIES AND BREXIT
In its previous statement of 4 February 2019 ESMA communicated that its Board of Supervisors also supports the continued access to UK Central Securities Depositories (“CSD”). CSDs are specialist financial organisations holding securities such as shares, either in certificated or uncertificated (dematerialised) form so that ownership can be easily transferred through a book entry rather than the transfer of physical certificates. This allows brokers and financial companies to hold their securities at one location where they can be available for clearing and settlement. This is usually done electronically, making it much faster and easier than was traditionally the case where physical certificates had to be exchanged after a trade had been completed. In some cases, these organisations also carry out centralised comparisons, and transaction processing such as clearing and settlement of securities.
ESMA has now confirmed that the recognition process is still on-going, the results of which will be published as soon as the process is finalised.
NEXT STEPS
This move from ESMA is a welcome one in ensuring that access to a UK clearing house can continue unaffected in a no deal Brexit scenario, so that both EU and UK counterparties will continue to comply with their regulatory obligation with regard to over the counter derivatives clearing.
To access the full ESMA press release, please click here.
To access other newsletters we have written on Brexit, for topics such as the Temporary Permissions Regime, the draft version of FSMA and the new wave of EU national legislation relating to financial services please click here.
For more information, and any guidance or advice on your clearing addenda and the impact on CPPs locations post-Brexit, Cleveland & Co, your External in-house counsel, are here to help.
[1]For a full analysis of the MoUs, please see our recent article:ESMA and FCA sign memorandum in case of no deal Brexit
