Brexit and the Market for Central Clearing of Derivatives in the EU

Christoffer Krejlund Wismann & Henrik Balling Teisen

Student thesis: Master thesis

Abstract

As a result of Brexit, the continuity of the financial markets as regards central clearing of derivatives are at stake and very much dependent on whether the European Union and the United Kingdom reaches an agreement that allows for UK central counterparties (CCPs) to continue their businesses within the Union. Brexit means in principle that the UK becomes a third country, meaning that it will no longer be subject to EU regulation. It also means that UK-CCPs would no longer be allowed to provide clearing services within the Union until they eventually receive authorisation to do so, and only if an equivalence decision has been made. In case the UK and the EU doesn’t reach an agreement, there is a possibility that markets for central clearing will be subject to fragmentation, due to the fact that certain CCPs would be forced to relocate to EU27 in order to provide clearing services in the Union. Such a fragmentation would increase systemic risk and thereby cause a negative impact on financial stability. Due to the significant size of derivatives markets and their influence on the financial system, it is vital to ensure a high level of financial stability and transparency throughout the markets. In order to do so, the EU and the UK should reach an agreement that enables CCPs to continue their clearing services within the EU. A possible solution to this would be a model similar to the one that Switzerland currently has with the EU, which includes bilateral agreements between the EU and the UK on terms such as the free exchange of certain financial services, including clearing services. Such an agreement would result in the best combined outcome for both parties taking into consideration legal, economical and political interests. This solution doesn’t solve the issue that CCPs of a certain size would have to relocate to EU27 in case the Commission proposal to EMIR is adopted, which triggers an increase in systemic risk, hence a decrease in financial stability. To limit the impacts of such a fragmentation, interoperability arrangements between existing CCPs should be established. This would reduce exposures in the market and, thus, lower the costs of market participants and result in a decrease of market risks. Through the Commission proposal to EMIR the EU will be able to retain a certain level of transparency and control in the clearing markets to ensure that a high quality of supervision and regulation is maintained by the UK.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2018
Number of pages116