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Britain and EU finalise temporary derivatives clearing accord

LONDON (Reuters) – The Bank of England and the European Union’s securities watchdog said on Monday they have agreed on the information-sharing arrangements needed for the bloc’s banks to continue using clearing houses in London from January to June 2022.

Britain’s unfettered access to the bloc ends on Dec. 31, and Brussels had already decided it would grant temporary access for UK clearing houses for 18 months.

An updated cross-border regulatory accord between the BoE and the European Securities and Markets Authority (ESMA) was also needed to implement the decision.

ESMA said the temporary access will apply to three clearing houses in Britain: the London Stock Exchange’s LCH, energy and agricultural futures and options clearer ICE Clear Europe, and LME Clear, which clears trades on the London Metal Exchange.

It has classified ICE Clearing and LCH as being “systemically important”, meaning they will face close EU scrutiny on an on-going basis, particularly in any market crisis.

Brussels has said that banks operating in the EU should use the 18 months to cut their “excessive reliance” on clearers in London.

During this period, ESMA will conduct a comprehensive review of the systemic importance of each UK clearer and take any “appropriate measures” to address financial stability risks.

Measures could include deciding that a foreign clearer or some of its clearing services are of such substantial systemic importance that it should not be allowed to serve EU customers, ESMA said.

“ESMA undertakes to conduct such a comprehensive review in due time,” it said.

LCH clears the bulk of euro-denominated interest rate swaps, a derivatives contract that helps companies shield themselves against unexpected moves in borrowing costs.

LCH said it would continue to engage and cooperate with authorities regarding “long-term permanent” access to the EU.

But EU policymakers and the European Central Bank have long wanted euro clearing relocated to the euro zone, now seen by the bloc as all the more urgent due to Brexit.

Eurex Clearing in Frankfurt has been building up market share in euro swaps clearing but banks so far have been loathe to shift large positions there due to cost and complexity.

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