The pre-Christmas equivalence determination for the UK CCPs was forced on the EC because without it EU27 parties could not have continued to access the UK CCPs: EMIR Article 4(3) requires OTC derivatives contracts that need clearing to be cleared in a CCP which is either EU-based and approved or non-EU but recognised (under article 25, which requires “equivalence”). Exchange-traded derivatives are outside this regime because EMIR defines “OTC derivative” as a derivative, the execution of which does not take place on a regulated market or a third-country market considered equivalent under article 19(6) of MIFID II). So if that market is a UK exchange, a hard Brexit would overnight would mean all the contracts traded on it by EU27 parties fell out of this exclusion and made them “OTC derivatives” – the kind of illogical conclusion that it seems our politicians will willingly accept for the sake of political expediency. If these exchange-traded contracts fell into the “OTC” classification, it would mean that the EMIR requirements relating to clearing via a CCP, margining, reporting, and so on, would start to apply; and the calculation of an entity’s overall OTC exposure (which determines whether its derivative contracts fall into the clearing regime or not) would overnight include the value of any such exchange-traded derivatives. The solution is simple of course: to extend the “equivalence” declaration for CCPs to cover these exchanges. Various concerned EU27 trade bodies have made a plea for this, for obvious reasons: unlike these situation with CCPs, they would not lose access to UK CCPs, but if they did these consequences under EMIR would result. Could they not use an EU exchange? Well yes they could, if the contract they want is traded there – but for Brent crude futures, various metals, and probably other commodities, London is the only place to find these contracts.
Head of Knowledge Management (Finance and Projects)
Mark Daley joined DLA Piper in 2015 after over thirty years’ experience as a debt finance lawyer in private practice in London and Hong Kong.