Brexit: Euro-clearing in the Eurozone?

Brexit has intensified concerns regarding London’s position as the hub for the clearing of euro-denominated derivatives and swaps. These concerns have prompted both the European Commission and the European Central Bank (“ECB”) to propose amendments to existing legislation.  Specifically, the European Commission is proposing to amend the regulatory and supervisory framework for central counterparties (CCPs). For its part, the ECB is seeking powers to regulate CCPs.


The global financial crisis prompted financial regulators to introduce legislation requiring certain derivatives contracts to be cleared through a CCP; in the EU, this requirement is being introduced pursuant to the European Markets Infrastructure Regulation 648/2012 (“EMIR”).

Over the past few years, the amount of global and EU CCP activity has grown rapidly. A significant volume of euro-denominated transactions is cleared in the UK.  According to ECB estimates, UK CCPs clear approximately 90% of the euro-denominated interest rate swaps of euro area banks, and 40% of their euro-denominated credit default swaps.

While introduced to alleviate the market risk associated with over-the-counter (“OTC”) transactions, central clearing itself is not risk-free. In particular, the concentration of risk in CCPs means that a CCP’s failure could significantly disrupt the financial system and have systemic implications.

Once the UK leaves the EU, UK CCPs will no longer be subject to the regulatory and supervisory framework for EU CCPs set out in EMIR. This will have obvious implications for the Eurosystem’s ability to monitor and manage the risks posed by UK CCPs.  Moreover, the ECB does not currently have the competence necessary to regulate the activity of clearing systems, as recognised by the European Court of Justice in Case T-496/11 United Kingdom of Great Britain and Northern Ireland v European Central Bank.

In view of the concerns regarding the regulation of CCPs post-Brexit, the European Commission is proposing to amend EMIR to introduce a sliding scale of additional supervisory requirements for third-country central counterparties (“CCPs”). In addition, the ECB is seeking to amend Article 22 of the Statute of the European System of Central Banks and of the European Central Bank (the “Statute”) to give the ECB the power to regulate clearing systems, in particular CCPs.

New Supervisory Arrangements for CCPs

On 13 June 2017 the Commission published a proposal to refine the supervisory arrangements applicable to both third country and EU CCPs (the “Proposal”). This includes EU authorisation and establishment requirements for any third-country CCP posing a substantial risk to the EU and the EU’s financial stability. It also includes new supervisory arrangements for all CCPs.

Third-Country CCPs

Currently, third-country CCPs can operate in the EU once recognised under EMIR’s equivalence provisions. The Proposal provides for a new two tier system for third-country CCPs. Under that system, the existing EMIR equivalence framework will continue to apply to Tier 1 CCPs, which are non-systemically important CCPs.  However, Tier 2 CCPs, which are systemically important CCPs, will be subject to stricter, additional requirements.

The Proposal sets out the objective criteria by reference to which the Commission will determine whether a third-country CCP is “Tier 2”. It also confers the Commission with the power to further specify the relevant criteria by delegated act.

The stricter, additional requirements for Tier 2 CCPs include complying with:

  • the prudential requirements applicable to EU CCPs, namely capital requirements, conduct of business rules, margin, etc; and

  • any additional requirements set by relevant EU-central banks concerning, for example, the availability or type of collateral held in a CCP, segregation requirements, liquidity arrangements, etc.

Tier 2 CCPs must also agree to provide ESMA with all relevant information and to enable on-site inspections, as well as a legal opinion confirming that such arrangements are valid in the CCP’s home country. A CCP will need to have all necessary measures and procedures in place to comply with the above prudential and information requirements.

In the event that a Tier 2 CCP is considered to be of such systemic importance that the additional requirements are insufficient to mitigate the potential risks, the Proposal empowers the Commission to adopt an implanting act declaring that the CCP may only provide services in the EU if established and authorised in the EU. This determination must be made on the basis of a recommendation made by ESMA in agreement with the central bank that issued the relevant currency (the “issuer bank”) .  

New Supervisory Arrangements for all CCPs

The Commission is proposing to set up a new CCP Executive Session, which will be responsible for all matters relating to CCPs within ESMA, including ESMA’s new supervisory powers for EU CCPs and third-country CCPs.

The CCP Executive Session is to comprise several permanent newly-appointed independent members, along with the relevant national authorities responsible for the CCP concerned. The issuer bank will participate in the CCP Executive Session as a non-voting member, as will the European Commission.

This proposed new role for issuer banks is to address the Commission’s concerns regarding the potential for misalignments when supervisory actions impact on key responsibilities of central banks in areas such as price, stability, monetary policy and the payment systems. According to the Commission:

"In crisis situations, these misalignments can amplify the risks to financial stability if the assignment of responsibilities between authorities remains unclear."

The Commission’s proposal must now be considered by the European Parliament and the EU’s Council of Ministers. You may access the Commission’s proposal here.

New ECB Competences

The ECB’s proposal to amend Article 22 of the Statute ties in with the Commission’s Proposal and the role which it envisages for issuer banks. Specifically, the ECB is recommending that it be provided with a clear legal competence in the area of central clearing.  The revised Article 22 would read as follows:

The ECB and national central banks may provide facilities, and the ECB may make regulations, to ensure efficient and sound clearing and payment systems, and clearing systems for financial instruments, within the Union and with other countries.

The Commission will next issue an opinion on the ECB’s recommendation, which must also be adopted by the European Parliament and the Council of the EU.

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.