ECB: don’t expect equivalence extension for UK CCPs

Central bank official says EC likely to stick to June 2022 deadline

European Central Bank, Frankfurt
The ECB is part of a working group set up to decide whether to extend the temporary equivalence offered to UK CCPs

The European Commission is likely to stick with its June 2022 deadline for halting equivalence for UK central counterparties, says an executive at the European Central Bank.

Despite concerns that a lack of equivalence for UK CCPs could hurt European firms, Fiona van Echelpoel, deputy director general of market infrastructure and payments at the ECB, says the EC will stand firm.

“I think the aim of the Commission, and precisely the reason for setting the period of 18 months, was to keep the mind focused and to go ahead with that deadline,” said van Echelpoel.

“I believe there is a commitment there to respect the June deadline, and I don't see any indications that it should be extended at this point of time.”

The original extension was granted in September last year, when the EC gave European market participants 18 months of equivalence to help them reduce reliance on UK clearing houses after Brexit – particularly for euro interest rate swap trading – and to enable EU CCPs to further develop their clearing capabilities.

Speaking on a panel at the Eurex Frankfurt Derivatives Forum on March 23, Van Echelpoel said European regulators were looking at the effects of such a move on European firms and the extent that non-European firms would be also willing to move.

But shifting euro derivatives clearing to the bloc is no easy feat.

The aim of the Commission, and precisely the reason for setting the period of 18 months, was to keep the mind focused and to go ahead with that deadline
Fiona van Echelpoel, ECB

According to data from the London Stock Exchange Group, 75% of LCH’s euro clearing volume originates from outside the EU. If the equivalence decision isn’t renewed, the remaining 25% would be required to move to the EU, resulting in a smaller pool of liquidity for European users.

Recent statements by EU regulators led Andrew Bailey, governor of the Bank of England, to suggest that if the EU wanted all euro-denominated derivatives clearing to move to the bloc, extraterritorial legislation would be needed, or a certain level of force.

On the same panel at the Eurex forum, Johannes Pockrandt, co-head of government and regulatory advocacy at Deutsche Bank, said it would be “expecting too much of European banks to be the sole facilitator of that necessary shift”.

“Ultimately, it is our global clients who direct us, and they will look at hard facts. They will look at whether there is efficient netting, is there the liquidity that we need, are there the systems that we need, and ultimately, what is our cost of clearing,” he said.

“We can have political ambitions, and we can have great strategies in place, but let's not forget that ultimately this is about client need and client choice, and that is made on very firm and hard evidence and indicators.”

As derivative markets are global in nature, Pockrandt warned that clients could move beyond the UK and EU, “if we don’t get things right”.

A lack of equivalence arrangements for financial services has already led to significant chunks of euro and sterling swaps trading moving to US-regulated swap execution facilities. Pockrandt did say, however, that UK venues appear to be regaining market share in credit default swaps this month.

Erik Müller, chief executive officer of Eurex, said on the panel that the clearing house had managed to gain 20% market share of clearing euro swaps by notional outstanding since launching its clearing partnership programme in 2018. This saw the CCP share some of the economics of its interest rate swaps segment with the 10 most supportive liquidity providers, and include them in its governance structure.

 

 

The basis between the fixed rate on a 10-year euro interest rate swap cleared at Eurex versus the same cleared at LCH has also come down in recent years. The so-called CCP basis spread was as high as 2.5 basis points in early 2017, but since September has been close to zero, and currently sits at 0.15bp. This means it’s more or less the same price to trade fixed rate swaps at both CCPs.

“We motivated the dealers in this market to quote tight spreads, and we saw that the [CCP] basis has essentially come down to zero, which is a very healthy signal that end-clients now have a choice between executing their swaps in London versus Frankfurt on the clearing layer,” said Müller.

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