EU offers reassurances to the Square Mile that UK clearing can continue post-Brexit

The EU has begun work to allow UK clearing to continue in the event of a no-deal Brexit, addressing Square Mile fears that the European market could be cut off in March next year.

The European Securities and Market’s Authority (ESMA) confirmed today that it will “adopt a temporary and conditional equivalence decision” to minimise disruption after London, the global derivatives market hub, exits the EU.

EU clearing members will be able to access UK central clearing counterparties (CCPs), that balance risk between the sellers and buyers in a deal and make sure that transactions are completed if a party defaults, following the decision.

Without the equivalence agreement European clearing members would have been breaking the law by accessing UK CCPs post-Brexit, which would have forced euro-denominated clearing contracts to be closed or transferred from London to the eurozone.

City of London Corporation chair Catherine McGuinness said: "Disruption to clearing houses in the event of a no-deal Brexit would pose a significant threat to financial stability, which could have repercussions beyond the UK and EU. This commitment by the European Securities and Markets Authority to maintain access for UK clearing houses on a temporary basis is an important step to tackling this cliff-edge risk and protecting financial stability.

“Further progress is now needed on contract continuity and cross-border data flows to ensure a no-deal does not cause disruption to the financial sector, as well as households and businesses on both sides of the Channel."

The announcement came as French central bank governor Francois Villeroy de Galhau warned that any equivalence agreement must not last longer than a year as he pushed for the industry to be relocated to Paris, the Financial Times reported.

Last month the Bank of England doubled down on its plea to the EU to put measures in place to allow European banks to access UK-based clearing houses after Brexit.

EU-based firms have derivative contracts worth a notional £69 trillion with UK CCPs, £41 trillion of which matures after Brexit, the Bank's financial policy committee said. Moving the contracts out of the UK could cost European businesses €22bn (£19.3bn) a year.

City lobby groups said the issue, which emerged as one of the key Brexit battlegrounds, was being used as a bargaining chip in a “game of high-stakes political poker”.