UK CCPs
Central clearing increases market transparency, mitigates credit risks and reduces the risks of contagion in the event of the default of one or more participants in a CCP. The provision of such services is therefore critical for ensuring financial stability. A disruption in the provision of clearing services could also affect the implementation of central banks’ monetary policy where transactions are cleared in the currency issued by a Union central bank. Moreover, financial instruments cleared by CCPs are also essential for financial intermediaries and their clients, e.g. to hedge interest rate risks, and a disruption in the provision of clearing services could therefore also create risks for the real economy of the Union.
) As of 31 December 2017, the outstanding notional amount of OTC derivatives is more than EUR 500 trillion worldwide, of which interest rate derivatives represent more than 75% and foreign exchange derivatives almost 20%. About 30% of all OTC derivatives are denominated in euro and other Union currencies. The market for central clearing of OTC derivatives is highly concentrated, in particular the market for central clearing of OTC interest rate derivatives of which about 97% are cleared in one UK CCP.
From 30 March 2019, UK CCPs will be “third-country CCPs” and, as such, may only provide clearing services if they are recognised by the European Securities and Markets Authority (“ESMA”) in accordance with Article 25 of Regulation (EU) No 648/2012. In the absence of the recognition of UK CCPs, counterparties established in the Union may not clear OTC derivatives that are subject to the clearing obligation pursuant to Article 4 of Regulation (EU) No 648/2012 in UK CCPs. That situation may result in temporary challenges for those counterparties to fulfil their clearing obligations, which in turn, may pose risks to the financial stability and the implementation of the monetary policy of the Union and its Member States. As announced in the Contingency Action Plan, it is therefore necessary that, in that exceptional situation, the legal and supervisory arrangements governing UK CCPs are determined as equivalent for a strictly limited period of time and under specific conditions so that those CCPs may continue to provide clearing services in the Union.
Decision
For the purposes of Article 25 of Regulation (EU) No 648/2012, the legal and supervisory arrangements of the United Kingdom of Great Britain and Northern Ireland consisting of the Financial Services and Markets Act 2000 and the European Union (Withdrawal) Act 2018 applicable to central counterparties already established and authorised in the United Kingdom of Great Britain and Northern Ireland shall be considered to be equivalent to the requirements laid down in Regulation (EU) No 648/2012.
This Decision shall enter into force on the day following that of its publication in the Official Journal of the European Union. It shall apply from the date following that on which the Treaties cease to apply to and in the United Kingdom pursuant to Article 50(3) of the Treaty on European Union. However, this Decision shall not apply in any of the following cases: (a) a withdrawal agreement concluded with the United Kingdom of Great Britain and Northern Ireland in accordance with Article 50(2) of the Treaty on European Union has entered into force by that date; (b) a decision has been taken to extend the two year period referred to in Article 50(3) of the Treaty on European Union.
Central Securities Depositories
CSDs are instrumental to financial markets. The recording of securities in a bookentry system (“notary services”) and the maintenance of securities accounts at the top tier level (“central maintenance services”) increase transparency and protect investors, as they ensure the integrity of the issue and prevent undue duplication or reduction of securities. CSDs also operate securities settlement systems, which ensure that securities transactions are settled properly and in a timely manner. These functions are critical in the post-trade clearing and settlement process and as such essential to the financial stability of the Union and its Member States. Securities settlement systems are essential also to monetary policy as they are closely involved in securing collateral for monetary policy operations. Furthermore, market operators in Ireland rely on the services of a UK CSD with respect to corporate securities and exchange traded funds constituted under the domestic law of Ireland.
From 30 March 2019, UK CSDs will be “third-country CSDs” and, as such, may only provide notary and central maintenance services in relation to financial instruments constituted under the law of a Member State if they are recognised by the European Securities and Markets Authority (“ESMA”) in accordance with Article 25 of Regulation (EU) No 909/2014. In the absence of the recognition of UK CSDs, Union issuers may not use UK CSDs to record transferable securities constituted under such laws in book-entry form in a CSD as required by Article 3 of Regulation (EU) No 909/2014. That situation may result in temporary challenges for issuers to fulfil their legal obligations. As announced in the Contingency Action Plan, it is therefore necessary that, in that exceptional situation, the legal and supervisory arrangements governing UK CSDs are determined as equivalent for a strictly limited period of time and under specific conditions so that those CSDs may continue to provide notary and maintenance services in the Union.
Decision
For the purposes of Article 25 of Regulation (EU) No 909/2014, the legal and supervisory arrangements of the United Kingdom of Great Britain and Northern Ireland consisting of the Financial Services and Markets Act 2000 and the European Union (Withdrawal) Act 2018 applicable to central securities depositories already established and authorised in the United Kingdom of Great Britain and Northern Ireland shall be considered to be equivalent to the requirements laid down in Regulation (EU) No 909/2014.
This Decision shall enter into force on the day following that of its publication in the Official Journal of the European Union. It shall apply from the date following that on which the Treaties cease to apply to and in the United Kingdom pursuant to Article 50(3) of the Treaty on European Union. However, this Decision shall not apply in any of the following cases: (a) a withdrawal agreement concluded with the United Kingdom of Great Britain and Northern Ireland in accordance with Article 50(2) of the Treaty on European Union has entered into force by that date; (b) a decision has been taken to extend the two year period referred to in Article 50(3) of the Treaty on European Union.
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