Sonntag, 16.12.2018 19:02 Uhr

Brexit and trading in EU derivatives and equities markets

Verantwortlicher Autor: Carlo Marino Rome, 23.02.2018, 12:27 Uhr
Fachartikel: +++ Wirtschaft und Finanzen +++ Bericht 7816x gelesen

Rome [ENA] The imminent withdrawal of the UK from the European Union has been a spur for the current reform of the EU legal framework for the supervision of third-country Central Countrparties (CCPs). CCP is an organization that exists in various European countries to help facilitate trading done in European derivatives and equities markets. These clearing houses are a sort of intermediary between buyers and sellers

of financial instruments and are often operated by the major banks in the country to provide efficiency and stability to the financial markets in which they operate. CCPs bear most of the credit risk of buyers and sellers when clearing and settling market transactions. Brexit imposes particular risks first of all because it will boost transaction costs. In the absence of a wide-ranging policy to make the euro area an attractive place for the migration of euro-denominated clearing services, it may drive central clearing services overseas. If transaction costs are high, it will be very difficult to sustain the currently large volume of euro-denominated clearing transactions.

If this happens, efforts to turn the euro into a global reserve currency will be undermined. The cross-border oversight of systemic CCPs will become more problematic. Brexit risks are real but nonetheless manageable over time because both the EU and the UK will remain committed to international regulatory convergence. The UK legal framework and general supervisory approach will continue to be consistent with EU requirements taking into account the ‘Great Repeal Bill’ presently discussed in the UK Parliament. The relocation requirement can be satisfied by opening up subsidiaries in the euro area.

The proposed EMIR II (European market infrastructure regulation) legal framework regarding the supervision of third-country CCPs is in principle rigorous. It is more forward looking, risk-based and proportionate compared to EMIR. Moreover, the introduction of a relocation requirement as an alternative measure will enhance current European Central Bank capabilities to check systemic CCPs. An unintended consequence of the relocation requirement might be to drive eurodenominated clearing to an overseas jurisdicition that has been granted equivalence instead of mainland Europe.

The projected EMIR II framework will continue to develop around the legal concept of equivalence but equivalence is by its very beginning neither resilient over political pressure nor long-lasting enough to provide a reasonably stable mechanism for the long term management of cross-border systemic risks. The monetary policy of the euro area lies with the Eurosystem and according to Article 3(1)(c) of the Treaty on the Functioning of the European Union (TFEU) is an exclusive EU competence. According to Article 127(1) TFEU, the primary objective of the Eurosystem is that of price stability in the Eurozone.

Strictly speaking, financial stability is not part of the constitutional mandate of the European Central Bank (ECB) and, therefore, it does not bear the status of core competence as those enlisted in Article 127(2). The financial stability is a task conferred upon the ECB by means of EU Secondary legislation, precisely, the Single Supervisory Mechanism Regulation (SRMR) and in accordance with Article 127(6). As a macroprudential regulator, the ECB is provided with macro-prudential powers to carry out the supervision of systemic banks in the euro area and it has responsibility in the preinsolvency stage of their resolution.

The Eurosystem is currently the owner and operator of a second-generation real-time gross settlement system for cross-border payments between commercial banks situated in the euro area. This system comprises two platforms: TARGET2 for the settlement of payments and TARGET2 Securities for the settlement of securities. The granting of more powers to European Securities and Markets Authority (ESMA) is also expected to be helpful for the implementation of a more proactive approach to cross-border financial crisis management. The introduction of a relocation requirement as a last resort for systemically significant third-country CCPs will also be a welcome development because it will bring those CCPs under the direct supervision of the ECB.

As long as it is desirable to keep the existing high volume of euro-denominated clearing and to magnetize the relevant business in mainland Europe, a more comprehensive package of measures will be required to turn the single market into a world-leading hub for capital markets. EU can learn from the experience of those who did it first, in this particular case the UK, by finding out how almost forty years ago Great Britain turned the City of London into the unique ecosystem of financial services that it is today. The equivalence framework should also be reviewed so that it becomes more resilient and stable over time. Treaty amendments also recommended to place the mandate and powers of ESMA on a proper constitutional basis.

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