Active account requirements for swaps clearing proposed under Emir 3.0 regulation will be unavoidable if participants cannot otherwise be incentivised to reduce their reliance on CCPs in the UK, a panel at the International Derivatives Expo has said.
Among the key topics discussed during Tuesday’s IDX panel exploring the future relationship between the UK and Europe was derivatives clearing post-Brexit, in particular relating to Euro denominated swaps.
Typically, the lion’s share of over the counter (OTC) EU/US interest rate swaps clearing volumes have been handled by the London Stock Exchange Group’s (LSEG) LCH SwapClear in the City. European policymakers post-Brexit have been vocal in their intentions to remove this to the Bloc after concluding that such a level of EU derivatives clearing taking place outside of the EU is a systemic risk.
Carrot or stick
“Since Brexit, Europe is considering urgently how much it should depend on non-EU countries,” said panellist Julia Frölich, senior expert for payments and settlement systems, Deutsche Bundesbank.
Europe has two options for encouraging derivatives clearing volumes back into Europe, Tuesday’s panel concluded. Aptly put by panel moderator Bruce Savage, head of Europe for FIA, the carrot and the stick. Either policymakers in the EU incentivises the migration or legislators make it mandatory using controversial “active accounts”.
Read more – Post-Brexit derivatives clearing tussle continues as European Commission clamps down on non-EU CCPs
In December, the European Commission published a proposal as part of Emir 3.0 regulation that would require all participants to hold active accounts at European CCPs for clearing at least a portion of certain derivative contracts. Elsewhere, UK CCPs ICE Clear Europe, LCH and the London Metal Exchange (LME) have been granted a temporary three-year equivalence until June 2025 by regulators.
“The EU should reduce exposure to UK CCPs. We need necessary incentives to nudge market participants. We need cooperation between the UK and EU to reduce stability risk,” she said.
Adding later: “If incentives don’t work we may have to use active accounts. There is a carrot option but sometimes you need other measures.”
The active accounts method has proved unpopular with participants across the Street who suggest the current proposals lack clarity and could damage competition in Euro-denominated products, according to a recent Acuiti report. Among the key arguments against is the suggestion that active accounts could encourage participants to take certain “uncompetitive” prices just to meet a minimum threshold of activity.
Read more – Backlash against the EU’s new active clearing account requirements continues as sell-side voice concerns
“Active accounts need to be calibrated in the right way. If you impose rigid thresholds it could be at the expense of the end clients,” said Haroun Boucheta, head of public affairs for securities services at BNP Paribas, also speaking on the IDX panel.
Tuesday’s panel follows the adoption of a long-awaited draft Memorandum of Understanding between the UK and Europe in May, aimed at establishing a framework for structured regulatory cooperation with respect to financial services in the UK.
“It represents a thawing. It’s a step forward as it is discussing the slightly thornier and more political issues like equivalence,” said panellist Jon Relleen, director of infrastructure and exchanges for the UK’s Financial Conduct Authority (FCA).