In a statement, the Commission said the time-limited equivalence decision was made to ensure market participants have enough time to reduce their exposure to UK-based CCPs.

It was confirmed in July that temporary equivalence would be granted, although further details were not released.  

Access to UK CCPs and issues around clearing have been a primary concern in the industry since the UK voted to leave the European Union in 2016.

The majority of derivatives clearing in Europe currently takes place in London, with the London Stock Exchange Group’s LCH dominating clearing of euro-denominated instruments, and handling around 98% of clearing of interest rate swaps globally.

“The heavy reliance of the EU financial system on services provided by UK-based CCPs raises important issues related to financial stability and requires the scaling down of EU exposures to these infrastructures,” the Commission said. “Accordingly, the industry is strongly encouraged to work together in developing strategies that will reduce their reliance on UK CCPs that are systemically important for the Union.”

In February, LCH defended itself against claims that euro-denominated clearing activity has moved to continental Europe following the Brexit decision. LCH maintained throughout the UK’s lengthy exit process that it has not seen a shift in activity, however, Cécile Nagel, CEO of EuroCCP, claimed activity is migrating towards continental Europe.

“Clearing houses, or CCPs, play a systemic role in our financial system. We are adopting this decision to protect our financial stability, which is one of our key priorities,” Valdis Dombrovskis, executive vice president at the European Commission, commented.

“This time-limited decision has a very practical rationale because it gives EU market participants the time they need to reduce their excessive exposures to UK-based CCPs, and EU CCPs the time to build up their clearing capability. Exposures will be more balanced as a result. It is a matter of financial stability.”

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The measures will be taken to preserve financial stability in the short-term, the Commission said in an update, and will allow EU-based firms to continue accessing UK-based clearing services from January 2021, once the post-Brexit transition period comes to an end.

While the move is time-limited, the Commission did not provide guidance on when the temporary access rights will expire.

“Such a time-limited decision would allow EU-based CCPs to develop further their capacity to clear relevant trades in the short and medium-term and EU clearing members to take and implement the necessary steps, including by reducing their systemic exposure to UK market infrastructures,” the Commission said.

The issue of clearing and access to CCPs has been at the forefront of concerns in the industry since the UK’s decision to leave the EU in 2016. European firms would face higher capital charges for transactions cleared in the UK if equivalence is not agreed.

The European Union is currently in the process of finalising EMIR 2.2, which will determine the third-country equivalence status of the UK. UK CCPs, including the London Stock Exchange Group’s LCH, largely expect to gain equivalence under EMIR 2.2. LCH dominates clearing of euro-denominated instruments, and currently handles around 98% of clearing of interest rate swaps globally.

At an industry event in February, LCH defended itself against claims that euro-denominated clearing activity has moved to continental Europe following Brexit. LCH maintained throughout the UK’s lengthy exit process that it has not seen a shift in activity, however Cécile Nagel, CEO of EuroCCP, claimed activity is migrating towards continental Europe.

Industry trade bodies, the Futures Industry Association (FIA) and the International Swaps and Derivatives Association (ISDA), recently urged authorities to confirm that it will adopt equivalence decisions under the finalised EMIR 2.2 framework, or grant temporary equivalence for UK CCPs until the rules are implemented.

“The finalisation of EMIR 2.2 is important for the purpose of allowing continued access for EU counterparties and their clients to deep liquidity pools in the UK,” said FIA president and CEO, Walt Lukken. “It is critical that UK CCPs continue to operate either under the finalised EMIR 2.2 or under temporary equivalence until such decisions can be made. We look forward to the EU taking swift action so there is no disruption in the market.”

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Pension funds currently face mounting complications with providing cash collateral as variation margin for their cleared derivatives, and up until this point, no solution has been found for them. 

Pension funds have been exempt from the clearing obligation as a result, and the European Securities and Markets Authority (ESMA) has proposed to extend this exemption to June 2021. This is due to the characteristics of some pension funds’ derivatives portfolios, which are typically long-dated and unidirectional, meaning they do not typically hold cash to post as variation margin to clearing houses.

However, regulators are concerned that by frequently extending the exemption, it will not solve the variation margin problem for pension funds as liquidity has increasingly shifted to the cleared market, due to heightened capital and collateral costs in for bilateral OTC derivatives.

With no solution currently insight, the European Commission has set up a dedicated stakeholder group bringing together key industry participants to work on a solution. 

“The European Commission has set up a dedicated stakeholder group which brings together pension funds, CCPs, banks, CSDs, EU policymakers and central banks in order to work on a robust solution to the cash VM issue that can be relied upon in stressed market conditions,” ESMA stated in a recent consultation. “This may imply the assurance of a liquidity provider to transform high-quality government bonds into cash at a cost.”

Some banks and clearing houses have pushed for collateral transformation services as a potential solution for pension funds. Yet according to ESMA’s report, banks have been reluctant to extend collateral transformation services to variation margin flows due to concerns of the impact it would have on their balance sheet.

ESMA is currently asking for industry feedback as to how it can progress on solutions for the pension fund community, and what it should recommend to the European Commission.

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The London Stock Exchange Group-owned clearing house dominates the clearing of euro-denominated instruments, despite years of debate over what would happen to activity following the UK’s withdrawal from the European Union.

LCH has maintained throughout the UK’s lengthy exit process that it has not seen a shift in activity, however speaking at the Post-Trade 360 event in Stockholm, Cécile Nagel, CEO of EuroCCP, claimed a trend towards activity migrating towards continental Europe is “clear and happening already”.

“The direction of travel is clear, there is going to be ongoing effort to drive more activity into continental Europe,” she said. “You can see it from some of the more recent rhetoric coming out of Brussels or out of the UK. You can see this happening today. Cboe is live in Amsterdam with their venue.

“And a few other interesting examples that get forgotten, [such as] when LCH shifted their euro-denominated repo activity from London to Paris. There may have been a number of factors, but Brexit certainly has been a factor.

“Recently Eurex released some new data to show they are capturing more euro-dominated derivatives clearing activity, so that trend is going to continue. Being located in the Eurozone if you’re a European CCP clearing denominated product, that is going to help in the medium- to long-term.”

Alongside Nagel on the panel was Alex Krunic, who joined LCH in May to oversee strategy of the clearing house’s EquityClear division as head of equities. Krunic was quick to refute the claims made by Nagel.

“If you look at empirical evidence, everything you’ve been talking about with Brexit, with the major shift from London, it hasn’t happened. We haven’t lost any business, nothing has moved. The reason why we consolidated Euro debt in Paris, is because it makes sense for those European institutions looking to fund themselves, that they fund themselves in their own zone.”

Krunic added that any fragmentation of the clearing activity would also be bad for efficiencies.

“LCH still has 98% in terms of interest rate swaps, clearing 98% of the global market, so if you’re part of that component that moves, all your counterparts are going to be somewhere else. So where do you get the efficiencies in terms of having access to that liquidity. When we’re talking about moving activity, any type of fragmentation is not good for the market.”

Much has been made of Europe drawing the activity – often quoted as being worth $200 billion – away from London, specifically LCH, and Germany’s Eurex in particular has been ramping up its efforts.

In September, the exchange group took steps to encourage market participants to migrate their derivatives positions to the German clearinghouse by removing fees for those making the move ahead of Brexit. Eurex Clearing introduced an incentive program supporting the migration of OTC interest rate derivatives positions with a 100% discount on booking fees until June 2020.

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In a keynote speech in London today, European Commission vice president, Valdis Dombrovskis, said that the Commission intends to extend the temporary equivalence for UK CCPs, which is due to expire in March 2020.

“As you know, central clearing has been identified as a clear systemic risk in case of a no-deal Brexit,” Dombrovskis said. “The Commission addressed it last year via a temporary equivalence decision. This will expire on 30 March 2020. Regrettably, the risk to financial stability has not yet been fully removed, because industry has not so far fully prepared. Therefore, I intend to propose to renew this time-limited equivalence decision beyond that date, to prepare for any eventuality.”

The intentions follow the move by fourteen trade associations to urge the European Commission to extend the temporary equivalence of UK CCPs. The Association for Financial Markets in Europe (AFME), the Futures Industry Association (FIA) and the International Swaps and Derivatives Association (ISDA), and others, wrote a letter to the European Commission to ensure limited impact to firms following Brexit.

“The associations request that the Commission amend the implementing decision on UK CCPs to extend the temporary equivalence until the date 18 months after entry into force of the relevant Commission delegated acts under EMIR 2.2, plus an additional three-month period to allow UK CCPs to serve termination notices to EU clearing members in the event that their recognition is withdrawn following ESMA’s review,” the letter stated.

AFME welcomed the move by the European Commission, stating that it is vital ensure continued access to clearing and settlement services for EEA firms and to avoid significant risk to financial stability in a no-deal Brexit scenario. Although AFME stressed that it is important the extension is officially confirmed as soon as possible.

“We hope that regulators in the EU27 and UK will continue to work together to address remaining regulatory issues, including finding a permanent solution to ensure access to UK CCPs and avoiding disruption to trading shares and derivatives,” Oliver Moullin, MD for Brexit at AFME, added. 

The issue of clearing has been at the forefront of concerns for the industry since the UK’s decision to leave the EU in 2016. Should the UK fail to gain clearinghouse equivalence, European firms would face higher capital charges for transactions cleared in the UK.

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The groups, which include the Association for Financial Markets in Europe (AFME), the Futures Industry Association (FIA) and the International Swaps and Derivatives Association (ISDA), wrote a letter to European Commission vice president, Valdis Dombrovskis, to highlight the need for an extension.  

In December last year, the European Commission granted temporary equivalence of the UK’s regulatory framework for CCPs until 30 March 2020. The associations urged Dombrovskis that without the ability to clear transactions across borders in the case of a ‘no deal’ Brexit, firms and the financial system more broadly would be massively impacted.

“It is important for the purpose of maintaining financial stability in the event of a ‘no deal’ Brexit for the Commission to provide this certainty in a timely fashion,” the letter said.

The trade groups added that it’s also important to ensure transnational protections for EU counterparties negotiated under EMIR 2.2 will be available if the UK is eventually not found to be equivalent, or in the event that UK CCPs cannot obtain recognition.

“The associations request that the Commission amend the implementing decision on UK CCPs to extend the temporary equivalence until the date 18 months after entry into force of the relevant Commission delegated acts under EMIR 2.2, plus an additional three-month period to allow UK CCPs to serve termination notices to EU clearing members in the event that their recognition is withdrawn following ESMA’s review,” the letter concluded.

UK CCPs, including the London Stock Exchange Group’s LCH, largely expect to gain equivalence under EMIR 2.2. David Schwimmer, CEO of LSEG, said at an industry event earlier this year that he confidently expects permanent equivalence will be granted to LCH when the regulation comes into force next year.

“Under EMIR 2.2, we expect to receive permanent recognition to continue operating as a third country CCP and continue serving our EU customers from LCH,” Schwimmer said. “There may be some technical gap between when the temporary recognition would expire and EMIR 2.2 comes into force, but we are certainly engaged with the regulators on that and we expect there would be a technical extension there.”

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Nine major financial institutions have called on regulators to take action to make central counterparties (CCPs) safer amid concerns that clearing houses may fail when faced with severe market shocks.

BlackRock, Goldman Sachs, JP Morgan, Allianz, Citi, Societe Generale, State Street, T. Rowe Price and Vanguard published a joint paper detailing how regulators could improve the “safety and soundness” of CCPs. 

In a statement, the industry heavyweights said that CCPs have been increasingly relied upon to protect from counterparty losses during market shock events. Despite regulators taking steps to improve the situation in recent years, the banks and asset managers agreed that issues relating to resilience, recovery and resolution of CCPs need action.

“Our recommendations would help ensure that clearing members’ and end-users’ exposures to the CCP are limited, ascertainable and manageable,” said Marnie Rosenberg, global head of clearing house risk and strategy at JP Morgan.

The recommendations the organisations have put to authorities focus on the key concerns around resilience, recovery and resolution.

They include ensuring CCPs are subject to greater risk management standards, requiring CCPs to make “material contributions” of their own capital to the default waterfall, introducing a clearing ballot to support CCP recovery, and regular reviews of CCP rulebooks by resolution authorities with CCP primary regulators, and systemic risk regulators.

“Together, our recommendations will help ensure that CCPs are optimally structured to make sure the market remains resilient in the unlikely event of a meaningful disruption,” Eileen Kiely, Deputy head of counterparty and concentration risk at BlackRock, commented.

Similarly, Vanguard’s global head of capital markets legal and regulatory at Vanguard, William Thum, added that although many risks related to central clearing have been mitigated, additional protections are needed to strengthen margin calculations and default fund components, while preserving assets of non-defaulting participants.

“Together, these recommendations form a path forward to aligning incentives and enhancing financial stability through even stronger CCPs,” said Nicolas Friedman, global co-head of counterparty risk at Goldman Sachs.

The debate over CCP safety and soundness was given impetus last year after a high-profile default at the Nordic clearing house run by Nasdaq caused two-thirds of its mutual default fund, which its clearing members contribute to, was used to cover the loss.

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Citi’s client cleared swaps margin stood at over $28 billion in the second quarter of the year, according to data collected by Clarus Financial Technology (Clarus FT), representing 27% of the total amount of margin posted for the US swaps market.

Between the first and second quarter alone, Citi increased its client cleared swaps margin by nearly 8%, outpacing its other US rivals.

Citi is followed by Morgan Stanley which held a 16% market share of $17 billion, and JP Morgan with a 14% share and $14 billion of margin, according to the Clarus FT data.

The top five swaps dealers collectively held just over three quarters of the cleared swaps market, and the top seven held a market share of 90%.

Citi has fast emerged as one of the most active cleared swaps dealers in both the US and Europe, and has demonstrated a long-term commitment to its clearing business around the world as some of its competitors, including Deutsche Bank, have exited the business.

It was the first futures commission merchant (FCM) to clear a swaps transaction for end clients domiciled in the US on Eurex Clearing in February this year, enabling the Frankfurt-based clearing house to expand its US distribution base. Citi also cleared the first FX cash-settled forward, on behalf of Eaton Vance Management, with CME Group in January.

Most recently, Citi combined its equities division with the prime, futures and securities services (PFSS) business, as it looks to provide a full coverage of trading, electronic execution, financing, clearing, custody and fund services all under one house.

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Girolami will reporting directly to LCH Group CEO Daniel Maguire, with responsibility for expanding the clearing house’s growth strategy across its business lines, including services for interest rate derivatives, FX, equities and fixed income.

“LCH has an impressive track record of partnering with the markets that it serves, in order to drive innovation and provide best-in-class risk management. Its open access approach and strong customer focus are unique, and I’m honoured to be asked to lead LCH Ltd for the next stage of its growth,” commented Girolami.

Most recently, Girolami held the position of deputy CEO of French bank Credit Agricole’s corporate and investment banking division, having joined the institution in 2015 as global head of financial markets.

Prior to this, Girolami spent seven years with Standard Chartered Bank from 2008 to 2015, and held previous roles at Bear Stearns and BNP Paribas.

She will replace the current LCH chief executive, Martin Pluves, who is due to step down from the position on 31 July to pursue other opportunities.

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The trade, which was executed by BNY Mellon on behalf of a Dutch-based insurance company client, originally faced Morgan Stanley as the counterparts, and ultimately cleared with Eurex.

Under this structure, a securities loan is negotiated bilaterally with the borrower that will eventually be cleared and settled with Eurex, which then becomes the counterpart to both the lender and borrower. BNY Mellon administers the loan with Eurex Clearing until the securities are returned and the loan is closed.

BNY said the transaction represents a major new route to market for its securities lending clients, who will now have the ability to capitalise on growing market demand to undertake securities finance within a centrally-cleared environment, without the obligations and responsibilities of traditional clearing house membership.

“Central clearing will add capacity to the market and provide new opportunities for our clients. Those clients who choose to participate in this new distribution channel should see increased utilisation and better pricing, all while facing a highly-rated clearing house as counterparty,” said James Slater, global head of securities finance, liquidity and segregation, BNY Mellon.

Last year, BNY Mellon helped facilitate the first cleared securities lending trade executed by Dutch pension fund PGGM where it acted as the global custodian.

Eurex Clearing’s securities lending CCP aims to reduce counterparty risk exposure and remove the need for multiple credit evaluations for loans in global fixed income securities, equities and exchange traded funds (ETFs).

“This is just the beginning, and we anticipate much greater utilisation of our services going forward as the securities finance industry looks to realise the benefits of a CCP model,” added Marcel Naas, managing director of Eurex Clearing’s Lending CCP.

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