The European Commission should not allow the current temporary UK clearing equivalence to lapse in order to avoid wider risks to the European financial system, according to a European Capital Markets Institute report – Setting EU CCP (clearing counterparties) policy.
The report said a policy to further develop central clearing in the EU should be part of a clear long-term strategy in the context of the Capital Markets Union (CMU), be market-driven and, again, be given the appropriate time to mature.
The alternative, to abruptly restrict EU firms’ access to UK-based CCPs, would result in clear collateral damage for EU banks and end users, put EU banks at a clear competitive disadvantage vis-à-vis it’s international counterparts and unnecessarily harm the EU economy.
The report said, A reduction of exposures to UK clearing counterparties “would disable effective client position risk management on commodity and financial risk exposures, while cutting off EU firms from large pools of liquidity, potentially increasing trading and hedging costs.”
It argues that in the short-term, the best way forward to address EU concerns about the exposure of EU firms to UK CCPs is to implement appropriate supervisory and regulatory co-operation.
The European Market Infrastructure Regulation 2.2 foresees ‘adequate’ cooperation between the EU and the UK and allows for hands-on supervision of UK-based systemically important CCPs by European Securities and Markets Authority (ESMA).
Any new supervisory structure needs to be given time to function properly before more radical changes are introduced, given the significant potential negative consequences for EU firms.
“Policymakers should treat the central role of CCPs in capital markets carefully,” said Karel Lannoo, General Manager of ECMI and CEO of Centre of European Policy Studies (CEPS).
He added, “Our report clearly show that any actions to move business to the EU should consider the broader structure in which such systems operate and should be part of a strategy to create a more integrated EU capital market.”
Apostolos Thomadakis, Researcher at ECMI and CEPS added, “Allowing market participants to determine the best market structure based on their trading needs and objectives will allow for a more organic, market-led and customer-driven development of the EU’s derivatives market infrastructure.”
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