Brexit – ESMA puts in place no-deal memorandums of understanding with the Bank of England to recognise UK CCPS

Last week, the European Securities and Markets Authority (“ESMA”) concluded Memorandums of Understanding (“MoUs”) with the Bank of England (“BoE”) on the recognition of central counterparties (“CCPs”) and the central security depository (“CSD”) established in the United Kingdom in the event of a no-deal Brexit.

The disorderly close-out of positions and losing access to UK-based CCPs such as LCH, whose euro-denominated clearing volume reaches around 808 billion a day (against 81 trillion Notional Outstanding), has been a long-standing fear for EU clearing members.

In view of limiting the negative impact on the financial stability of the EU from such post-Brexit disruption in central clearing, ESMA has also been a vocal supporter of continued access to the United Kingdom’s CCPs and the CSD.

Article 25 of the European Market Infrastructure Regulation (“EMIR”) specifically provides for a recognition regime for third-country CCPs. EMIR allows CCPs established in third countries to provide clearing services if they are recognised by ESMA. However, EMIR stipulates that any such recognition by ESMA depends on four conditions.

The first condition is the adoption of an equivalence decision. For the UK, such an equivalence was adopted on 19 December last year. Secondly, CCPs should be authorised in the UK and should be under the effective supervision of the BoE. The third condition under the EMIR recognition regime is the establishment of cooperation agreements with the relevant third-country supervisory authority. The fourth condition stipulates that the UK does not appear on the list of third-country jurisdictions that have strategic deficiencies in their anti-money laundering and anti-terrorism financing regimes. It is unlikely that the UK would be added to this list post-Brexit.

The MoUs between ESMA and the BoE are meant to satisfy the third condition of article 25 of EMIR. These MoUs set out the details of ESMA and the BoE’s intention to cooperate and exchange information in connection with any recognition demands received by ESMA.

The MoUs between ESMA and the BoE should thus allow ESMA to adequately and efficiently assess CCP recognition requests.

ESMA has already indicated that it intends to adopt recognition decisions ahead of the Brexit date, in a bid to prevent possible clearing disruptions in the event of a no-deal Brexit.