EU endorses overseas clearinghouses

The European Commission endorsed overseas clearinghouses, also known as central counterparties, in six overseas jurisdictions, on December 16 in a bid to ensure EU banks may continue to do business abroad and cement relationships with global financial partners outside the bloc as the UK prepares to exit.

According to the EU’s executive arm, clearinghouses in India, Brazil, New Zealand, Japan, the United Arab Emirates, and Dubai meet its regulatory standards.

The commission also said that rules governing trading venues in Australia, Canada, Japan, and Singapore are equivalent to those within Europe, essentially lowering the costs for European corporates hedging foreign business exposure.

“The EU cooperates closely with third countries to protect financial stability while supporting firms to operate across borders in global markets,” the EU’s financial services chief, Valdis Dombrovsksis, said in a statement. “We carry out a rigorous, case-by-case assessment of each country.”

Until now, so-called third countries—a term used to describe countries that don’t belong to the EU—have been subject to “transition regimes” that allow for temporary access and need to be renewed every six months, keeping companies and international financial-service providers in constant uncertainty.

“Financial markets are inherently global but regulation is still essentially local,” said Michael Collins, deputy chief executive of InvestEurope, which represents venture capital and private equity companies. “Regulators need to make different legal regimes talk to each other and ‘equivalence’ decisions are at the heart of this.”

The deals were bundled together to deliver a signal that Brexit isn’t stalling work in the pipeline, according to people familiar with the matter. Rules around equivalence have received heightened attention since the UK may have to seek similar arrangements to access the continent’s markets once it exits the EU.

As one senior French official said earlier this week, if an agreement isn’t reached between the EU and the UK before the two-year deadline after negotiations start, the UK will officially be a third country.

While Friday’s decisions signal the EU is looking to bolster market access overseas with other trade partners, it also sets an example of how the UK may have to proceed once it officially leaves the bloc.

In the absence of passporting rights, which give UK financial firms the right to sell products and services throughout the EU, equivalence arrangements are the alternative for the UK. Though it is still too early to tell, according to Collins.

“While it’s encouraging that the equivalence process has not entirely ground to a halt following the Brexit vote, no one should think this is a panacea,” Collins said.

This story was first published by WSJ Pro.

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