In November the EC and ESMA announced (following demands from pretty much everybody in the market back in October – FinBrief, 12th October) that UK CCPs would be granted temporary and conditional “equivalence” status under article 25 of EMIR on 30th March 2019 in the event of a hard Brexit (FinBrief, 2nd November). It did not state how temporary that would be nor what that conditionality might be, and this uncertainty created ripples. The 7th December joint letter from AFME, ISDA, ICMA and the FIA pleaded with them actually to make the declaration (condition on a hard Brexit happening) by mid-December. Their point was that the UK CCPs would be in breach of Article 25 on 30th March if they were not deemed “equivalent” by then and continued to provide clearing services to EU27 members, and that the rules of some of the UK CCPs require them to give at least 90 days’ notice to their members to terminate their membership and so avoid this. The EC’s position had been that an equivalence declaration could not be made while the UK is part of the EU, but its well-publicised 19th December announcement about various limited hard-Brexit measures includes a temporary equivalence decision – in the form of a “Commission Implementing Decision” under Article 25(6) of EMIR – that would become effective (so as to facilitate recognition of the UK CCPs under EMIR by ESMA) for 12 months following a hard Brexit on 29th March 2019: finally following the lead taken by the Bank of England in February (see FinBrief, 23rd February).
Giving us a taste of what we should expect to see in any further equivalence determinations, the preamble notes that the UK’s current legal and supervisory arrangements are equivalent – of course, they are identical. It notes that this requires “the effective exchange of information and coordination of supervisory activities between ESMA and the Bank of England” under “comprehensive and effective cooperation arrangements”. These are not yet agreed, according to the Bank of England on Wednesday, but on the same day ESMA said that it and the BOE are smoothly engaged and it expects an agreed MOU by the end of January, and that it has also asked the CCPs to submit applications and expects to approve them well before Brexit date. This was enough for ISDA to welcome it as “providing some necessary assurances that UK CCPs and EU clearing members do not take preparatory measures for a ‘no deal’ outcome, including ceasing clearing memberships at UK CCPs”. Meanwhile, the banking and financial industry is left with no better clarity regarding:
- the continued performance, novation, amendment and enforcement of cross-border derivative contracts and loan agreements
- the sharing of data
- the enforceability of judgments,
- the use of UK benchmarks
- and so on (see FinBrief 10th December for more).
The EC stated that “After examining the risks linked to a no deal scenario in the financial sector, and taking into account the views of the European Central Bank and the European Supervisory Authorities, the Commission has concluded that only a limited number of contingency measures is necessary to safeguard financial stability in the EU27”: these are issues where the EC has presumably concluded that the preponderance of problems lie with the UK’s financial services industry, rather than the EU27’s, and so are not within its remit.