The EU grants equivalence for US clearinghouses

Darren Sinden

UK businesses that could be impacted by the EU announcement include LCH, ICE Clear Europe and LME Clear

January is almost over and as yet there has been no substantive progress in discussions between the UK and the European Union, over the future relationship of UK financial services businesses with the trading bloc.

What’s more those negotiations could be overshadowed, and further sidelined, by an unseemly diplomatic row that is developing over the availability of COVID vaccines between the UK and its former European partners.

One would hope that calm heads will prevail here and that this spat does not get blown out of proportion and turn into a major incident.

In the interim, the EU has shown, whether intentionally or not, how it intends to undercut the UK’s financial services businesses. With the news that it has granted equivalence to US clearinghouses, after deciding that the US regulatory landscape matched its own.

To some extent, that decision smacks of double standards because the UK regulatory environment exactly mirrored that of the EU up until midnight on the December 31st, and there have been few if any changes of note to the UK framework since then.

What’s more most of the EU financial services regulation was drafted by UK based lawyers and despite some faults and recent criticism, the UK’s FCA and its fellow regulator, the PRA, are considered to be among the world’s best.

In granting equivalence to US clearinghouses the EU has opened the door to serious competition for UK clearers in European business. Thanks to an exemption UK clearers are currently able to service European clients and can continue to do so until June 2022.

However, if no formal agreement has been reached, between the UK and EU authorities, before that point, they could very easily lose that privilege.

Speaking about the decision over the US clearinghouses EU financial services commissioner Mairead McGuinness said that: “This decision is a significant first step in the process of recognising US central counterparties registered with the US Securities and Exchange Commission in the European Union”

She added that “We look forward to continued good cooperation between EU institutions and agencies, and the US Securities and Exchange Commission”

Under the terms of the EU decision, central counterparties, that are registered with the US SEC, can now apply for recognition from ESMA and once approved can begin to offer centralised clearing services within the EU.

UK businesses that could be impacted by the EU announcement include LCH, ICE Clear Europe and LME Clear.

Clearinghouses are essential to on-exchange trading in futures, options, equities and other securities. They often act as the central counterparty to these trades. Becoming the buyer to every and the seller to every buyer.

More recently they have played an increasingly important role in Swaps trading, where deals are often struck over the counter or OTC but are then submitted to a clearinghouse for processing, margining and eventual settlement.

The UK chose to leave the EU without a having deal in place over financial services. However, it’s hard to escape the feeling that the EU is playing hardball, if not being deliberately awkward when it comes to drawing up the terms of any future relationship between the City of London and the rest of Europe’s financial markets.

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