As we reach the final few months before the UK’s withdrawal from the EU on 29 March 2019 we thought it would be a good opportunity to update the market on the status of the LME Group’s Brexit plans.
We also want to address recent press speculation on the treatment of UK central counterparties (CCPs) and highlight some of the areas of remaining uncertainty.
LME Group Plans
On 29 October 2018 the Financial Times reported that the European Commission had committed to permitting UK CCPs to provide clearing services to EU institutions for a temporary period. Any interim solution permitted by the Commission is said to be conditional and based on equivalence standards. However, as the European Securities and Markets Authority (ESMA) is unable, by its own rules, to accept any applications from UK CCPs for recognition until the UK has left the EU, without a transitional period of this nature being put in place, European Economic Area (EEA) institutions would be required to resign their memberships of UK CCPs, including LME Clear.
We are actively engaged with relevant regulatory stakeholders in relation to this matter and will provide further updates to all members and the broader market as the situation develops.
LME – Licences for third country trading venues
Following Brexit the LME will be facing the EEA as a “third country” (i.e non-EEA) trading venue, which means we will no longer be able to rely on MiFID II provisions that grant pan-European access for all regulated markets. Whilst we note and support ESMA’s statements relating to a European-wide regime for third country trading venues, at present no such regime exists. Therefore, third country trading venues wishing to offer access to its systems must comply with the requirements in each relevant member state. To this end, we have submitted a licence application to the German regulator and an application for dispensation to the Dutch regulator. No licences are required for France, the Republic of Ireland or Norway although we have had constructive discussions with those regulators about the LME and the members that access our markets from those jurisdictions currently and in the future. We are also engaging with the national regulators in Cyprus in order to understand our obligations there.
LME – Trading venue equivalence
The regulatory framework to which the LME is subject, also needs to be considered as equivalent to that in place within the EU in order for our contracts to be designated as exchange traded derivatives (ETD) rather than over-the-counter (OTC) instruments for the purposes of European Market Infrastructure Regulation (EMIR). The equivalence determination process in this case is undertaken between regulatory authorities and is based on the overall regulatory framework in place in the UK, and as such there is little scope for LME involvement. However, we are very aware of the severity of the potential implications for our members and EEA clients if our contracts were to lose their ETD status and become OTC for the purpose of European law. We know that if EMIR were to apply, it could introduce new reporting requirements; some non-financial counterparty (NFC) firms currently designated as NFC- may become NFC+ (potentially tripping them over the clearing threshold); and the Commission has suggested positions would need to be bilaterally margined. We have expressed to the regulators the market-wide concern surrounding this remaining uncertainty. We have also emphasised the considerable technological and operational work that would be necessary in order to satisfy two sets of regulatory obligations for two sets of clients, in relation to the same contract.
We continue to speak with members on an on-going basis and our Brexit webpage contains relevant updates, together with further details on the impact of Brexit on the LME, LME Clear and our market participants. We welcome all questions and comments you may have on this matter and would encourage you to contact us using our dedicated email address or via your usual LME contact.
To complement this, we will be hosting a second member-only Brexit breakfast forum on 22 November 2018 between 8:00 and 10:00. Please email for more information.