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Derivatives trading: Commission plans to expand EU-based clearing capacity –

Derivatives trading in the EU still relies heavily on UK-based CCPs. The Commission wants to strengthen CCP clearing capability within the EU and has launched a consultation on this. CCPs, banks and other financial institutions as well as other interested parties can submit their comments to the Commission until 8 March 2022.

A CCP is an intermediary in derivatives trading that buys derivatives from one party and resells them to the other. The main purpose of a CCP is to minimise the risk that arises if one of the counterparties to a trade defaults. CCP clearing aims to increase financial stability by mitigating risks for financial firms and improving market transparency.

The EU Regulation on OTC derivatives, central counterparties and trade repositories (EMIR), adopted in 2012, requires that derivatives traded over-the-counter be cleared through a CCP.

Since derivatives trading in the EU is currently frequently carried out with the participation of CCPs from the UK and the Commission wants to recognise UK CCPs as equivalent to EU-based CCPs only until June 2025, experts say that more EU-based CCP entities are required to ensure the financial stability of the EU beyond June 2025.

Dorothee Atwell, investment fund and asset management expert at Pinsent Masons, said: “This just further manifests the EU Commission’s previous take that they regard an over-reliance on UK CCPs as a risk. However, we welcome the extension of the initial Brexit transition period by three years. This will provide market participants with the much needed additional time to reduce their exposure to UK-based CCPs.” 

The Commission proposes to enhance CCP clearing capacity in the EU by, among other reforms, making products such as pension funds subject to clearing and so expanding the scope of potential users of these services. The Commission also wants to better monitor European CCPs and so strengthen confidence in them. In addition, the Commission wants to make a general inventory of CCP clearing for investment assets in the EU. In the second half of the year, the Commission plans to present concrete measures to expand central clearing activities in the EU.

Commissioner Mairead McGuinness, responsible for financial stability, financial services and the Capital Markets Union, said: “Ensuring financial stability and further developing the Capital Markets Union are our key priorities. [CCPs] play an important role in mitigating risk in the financial system”.

“The Commission plans to come forward with measures to reduce our excessive dependence on systemic third-country CCPs, and to improve the attractiveness of EU-based CCPs while enhancing their supervision. We call upon all relevant stakeholders to engage in the consultation being launched today,” she said.

In September 2020, the Commission called on market participants to reduce their dependence on UK CCPs.