On 20 January, the European Commission presented its new Communication ‘The European Economic Financial System: fostering openness, strength and resilience’ which looks at how to reinforce the EU’s ‘open strategic autonomy’ in the macro-economic and financial fields through three mutually reinforcing pillars: (1) Promoting a stronger international role of the EU; (2) Further developing EU financial market infrastructures and improving their resilience; and (3) Further promoting the uniform implementation and enforcement of the EU’s sanctions. More specifically, the Communication puts forward how it intends to reduce its dependence on UK-based financial infrastructure going forward.
This notes describes the political ramifications of the Communication, namely on UK market infrastructures, on forthcoming key legislative reviews, and on the future MoU and equivalence decision. If you have questions about this note, wish to speak with us on our engagement work in the EU, or have colleagues who would like to receive similar updates in the future, please email europe@theia.org.
The EU puts ‘open strategic autonomy’ at the heart of EU financial services
Building on the recently published Commission’s Recovery Plan and CMU Action plan, the Communication places financial markets at the heart of the economic recovery and of the twin environmental and digital transitions. The CMU is once again described as key to redirecting private investment into sustainable projects and into businesses in need of capital post COVID-19.
However, this time the Communication goes a step further and frames financial services with a geopolitical angle, describing financial services policy as a tool to ‘strengthen the EU’s geostrategic influence’. Citing Brexit as a key trigger event, the Commission puts forward a new narrative on financial services relations with third country which focuses on reducing the EU’s dependence on third countries for financial services, including the UK.
We have identified three main areas in which the Communication is likely going to have a considerable impact:
- Impacts on UK CCPs - The Communication clearly spells out the new EU strategy regarding UK CCPs and more generally the ambition to reduce reliance on non-EU financial market infrastructures. In fact, the Commission underlines the urgency to develop the EU financial market infrastructures post-Brexit and increase their resilience to avoid over-reliance on the provision of such critical services from third-country jurisdictions. More specifically, the Communication makes it clear that EU clearing members should reduce their exposures to UK CCPs that are systematically important for the EU, in particular Over-the-Counter derivatives exposures that are denominated in euro and other EU currencies. This was motivated by financial-stability concerns related to the current exposure of EU clearing members towards UK CCPs. To address this, the Communication puts forward two action points for this year:
- ESMA’s CCP Supervisory Committee will undertake a comprehensive review of the systematic importance of third-country CPPs and their clearing services and activities in the Union in Q1 2021
- Based on ESMA findings, the Commission and the ESAs will issue recommendations by mid-2021 on how to address technical issues related to the transfer of contracts denominated in euro or other EU currencies to CCPs locating in the EU, in a view to facilitating such transfers.
- Impact on forthcoming legislative reviews - Concretely, this new narrative will most likely translate into key post-crisis financial services legislation being pulled towards the Commission’s political ambition to develop the EU’s ‘strategic autonomy’, especially regarding:
- MiFID review – The Commission explicitly references the upcoming MiFID review, due in the second half of 2021, as an opportunity to strengthen the international role of Euro. For the first time, the Commission delivers a list of key focuses for the coming legislative proposal:
- Increasing transparency in secondary bond markets
- Consolidated tape for corporate bonds
- Possible review of the ancillary activity exemption
- Broader impact of MiFID provisions in context of ETS trading
- Benchmark review – The Commission stated it will review the Benchmarks Regulation in 2022 with a view of stimulating Euro-denominated indices in key strategic areas (‘nascent energy markets’) as well as reviewing the implementation of IBOR benchmark reform
- Impact on ongoing MoUs negotiation and future equivalence determinations - The extent to which this new narrative will influence the EU’s position on the ongoing UK-EU negotiations on the future MoU is yet to be seen. However, when presenting the Commission’s Strategy, EU Commissioner for Financial Services Mairead McGuinness called for a serious rebalancing of the EU-UK relationship on financial services. She stressed that the EU – who is ‘ready to protect its interest’ - would only grant equivalence where it is in ‘the strategic interest of the EU’. She also stated that the forthcoming MoU on financial services will not replace membership of the Single Market and would reflect the ‘absence of clarity on the extent to which the UK intends to diverge from the EU regime’.
Next steps
The IA’s International and European Committee will discuss any potential impacts on members next week and the required actions (if any). We will keep you updated on future developments.