Written evidence from the Exchange Group (LSEG)

1. London Group (LSEG) welcomes the opportunity to contribute to the ’ EU Financial Affairs Sub-Committee inquiry in and .

2. Group (LSEG) is a global financial markets infrastructure . Its diversified global business focuses on Information Services, Risk and Balance Sheet Management and Capital Formation. The Group supports global financial stability and sustainable economic growth by enabling and economies to fund innovation, manage risk and create jobs. The Group can trace its history back to 1698.

3. Post trade and risk management services are a key part of the Group’s business operations. In addition to majority ownership of LCH, a multi-asset global CCP operator, LSEG owns CC&G, the Italian house and Monte Titoli, a leading European custody and business.

4. In Capital Markets, the Group operates a broad range of international equity, ETF, and derivatives markets, including London Stock Exchange; Borsa Italiana; MTS (a European market); and Turquoise (a pan-European equities MTF). Through its platforms, LSEG offers market participants, unrivalled access to Europe’s capital markets.

5. In Information Services, through FTSE Russell, the Group is a global leader in financial indexing, benchmarking and analytic services with approximately $15 trillion benchmarked to its indexes. The Group also provides customers with an extensive range of data services, research and analytics through The Book, Mergent, SEDOL, XTF and RNS.

6. LSEG Technology develops and operates high performance technology solutions, including trading, market surveillance and post trade systems for over 40 organisations and exchanges, including the Group’s own markets.

7. As a systemically important financial markets infrastructure business, LSEG has a responsibility to ensure the orderly functioning of markets and continuity of service for its customers, shareholders and other stakeholders in any circumstance. With a strong global footprint and significant infrastructure businesses across the UK, EU, US and Asia, the Group is well positioned to adapt to any eventual outcome in the relationship between the UK and the EU.

8. We support the ambition set out by the UK and the EU in the joint Political Declaration, agreed on 17 October 2019, for “an ambitious, broad, deep and flexible partnership”1. Furthermore, we strongly support the language in paragraph 36 of that agreement relating to conclusion of equivalence assessments by the end of June 2020. We would encourage positive equivalence determinations by both sides in order to provide certainty to market participants.

1 Political Declaration setting out the framework for the future relationship between the European Union and the , paragraph 3. 1 LCH Group

9. LCH Group (LCH) is a multi-asset global CCP operator majority-owned by London Stock Exchange Group. LCH has legal subsidiaries in the UK (LCH Ltd), (LCH S.A.), and the US (LCH LLC). Given the global nature of LCH activities and customer base, we also have offices, operations and employees in New-York, Singapore, Sydney and Tokyo. LCH is a leading multi- asset class and international , serving major international exchanges and platforms as well as a range of OTC markets. It clears a broad range of asset classes, including securities; exchange-traded derivatives; ; foreign exchange derivatives; interest rate swaps; credit swaps and ; and sterling and US dollar denominated bonds and repos.

10. As a systemically important institution, our priority remains to ensure the orderly functioning of markets, continuity of service to our customers and supporting financial stability. As such it remains LCH’s objective to ensure a smooth transition for our customers whatever the outcome of the negotiations around the future UK/EU relationship.

11. During the discussions on the Withdrawal Agreement, LCH welcomed action taken by the UK and EU authorities to grant temporary equivalence to UK and EU CCPs in case there was a failure to reach an agreement (a no-deal Brexit). This ensured there would be unfettered access by EU firms to UK CCPs in case of no-deal and the same for UK firms to EU CCPs.

12. As a result of the terms of the Withdrawal Agreement, LCH Ltd continues to operate under an EU licence as a CCP authorised under the European Market Infrastructure Regulation (EMIR) until 31 December 2020.

13. Since the 2016 referendum on EU membership, LCH has seen no discernible change of market behaviour in relation to its services. In fact, LCH delivered record clearing volumes in 2019 across multiple asset classes. Activity in its OTC derivatives and fixed income clearing services exceeded 2018’s volumes. Growth has been driven by increased flow from new and existing customers looking to access the efficiencies of clearing in 26 currencies and in an internationally diversified membership and clients across 62 countries. In 2019, SwapClear, LCH’s interest rate derivatives clearing service, registered over $1,229 trillion in notional, an increase of 14% from 2018’s volumes. Compression volumes also continued to grow, with more than $920 trillion compressed over the course of the year, up 19% from 2018. This is estimated to have saved $35 billion in capital to our members over the course of the year. During the year, LCH was the first CCP to launch clearing for €STR swaps and expanded its non-deliverable swaps offering to cover five additional currencies.

14. We have welcomed UK authorities early clarity on the adoption of a Temporary Recognition Regime (TRR).This would enable LCH SA and CC&G to provide clearing services and activities in the UK for up to three years from the commencement of the TRR, extendable by HM Treasury in increments of up to twelve months each. The TRR will come into effect at the end of the transition period.

15. Given the fundamental importance of the role of clearing, and LCH in particular, to financial stability, we would highlight the importance of reciprocal mechanism ensuring EU firms’ access 2 to UK CCPs to be granted by the end of September 2020 at the latest. In the absence of legal certainty by this date, EU banks and buyside clients would face material risks of disruption, raising serious concerns on overall financial stability. We are therefore seeking a permanent recognition of LCH Ltd in order to ensure EU banks and buyside clients can access to the services LCH provides without disruption. This includes not only the adoption of equivalence decisions by the EU authorities on the legal and supervisory arrangements of the UK but also the recognition of LCH Ltd by the end of September 2020.

16. When it comes to clearing, LSEG’s priority is to ensure the use of the EMIR framework and equivalence in a proportionate and predictable and stable manner.

17. In the longer term we believe that clearing, and in particular the clearing of OTC Derivatives markets, is global in nature. These global markets need internationally integrated CCPs to support their activities and ensure efficiencies and diversification in the risks managed. This is illustrated by our SwapClear service. SwapClear remains the largest OTC rates liquidity pool in the world, processing over $1.2 quadrillion in notional volume in 2019, in 26 currencies, over tenors stretching from one month to 51 years and referencing dozens of different benchmark rates. Our members and clients across 62 countries recognise the benefits and efficiencies offered through LCH global pool in terms of costs and risks and acknowledge that fragmentation would only lead to increased costs and systemic risks for both EU and non-EU financial markets.

18. The Financial Stability Board (‘FSB’) and the G20 members’ jurisdictions have been promoting cross-border arrangements between jurisdictions to avoid market fragmentation and enhance financial stability in the derivatives market, as market fragmentation leads to increased costs and financial stability risks. In fact, the EU has granted recognition to 32 CCPs in 15 jurisdictions designated as equivalent to ensure EU firms can access to CCPs around the world and the material benefits these bring to users in multiple jurisdictions. In line with this, we believe that internationally integrated businesses which bring material benefits to users in multiple jurisdictions should be supported by global regulatory and supervisory oversight based on cooperation among authorities and proportionate deference mechanisms.

19. The EU has recently adopted an enhanced third country regime for CCPs in amending the EU regulation on CCPs (EMIR). Under the new regulation, third country CCPs which are systemically important for the EU will need to meet additional conditions for recognition. EMIR requires CCPs that are considered as systemically important to the EU to be directly supervised by ESMA and directly apply EMIR requirements.

20. The new enhanced third country regime contains a wide range of tools to mitigate concerns that might rise on the EU side, in particular, the direct application of EMIR requirements and the involvement of ESMA and EU central Banks in the oversight of third country CCPs that are of systemic importance for the EU. This involvement should be proportionate and predictable, allowing a smooth cooperation between EU and UK authorities on the supervision of UK CCPs.

21. We continue to engage with the relevant regulatory authorities in respect of the -term recognition of LCH Ltd under the revised supervisory framework for EU and third country 3 CCPs (“EMIR 2.2”) before the end of the transition period, in a timing that gives sufficient legal certainty and predictability to ensure all parties can continue to operate in a safe and sound environment.

22. LCH Ltd is subject to extensive supervisory input as it is directly regulated by more than 20 authorities around the world, in addition to the Bank of , its home supervisor in the UK. We have been regulated by the US CFTC since 2011 and are regulated in several other G20 jurisdictions including Australia, Canada, Hong-Kong, Japan and Singapore. We would welcome the involvement of EU authorities in the supervision of LCH Ltd post-Brexit as this is a common practice across the globe. Likewise, as an internationally integrated business we are subject to several regulatory regimes. We operate to the highest standard applicable, and sometimes beyond that. We would therefore welcome continuous application of EMIR requirements to LCH Ltd and are committed to continue operating at the highest standards.

23. We firmly believe that enhanced regulatory supervision and regulation on a global scale will far outweigh any -term political benefits of location-based policies such as the one available under EMIR new framework.

24. The overwhelming response from members and clients indicates that there is no support for fragmentation of global liquidity and customers want to be able to continue to access LCH services post-Brexit and obtain the numerous benefits of the extensive suite of products cleared by us in a single CCP. SwapClear remains the largest OTC rates liquidity pool in the world, processing over $1.2 quadrillion in notional volume in 2019, in 26 currencies, over tenors stretching from one month to 51 years and referencing dozens of different benchmark rates. Our members and clients across 62 countries recognise the benefits and efficiencies offered through LCH global margin pool in terms of costs and risks and acknowledge that fragmentation would only lead to increased costs and systemic risks for both EU and non-EU financial markets.

London Stock Exchange plc

25. London Stock Exchange plc is a Recognised Investment Exchange under Part XVIII of the UK’s Financial Services & Market Act 2000 (FSMA 2000). It operates the world’s most international , with companies from over 100 countries quoted across our markets. London Stock Exchange’s markets include the Main Market – London’s flagship venue for equity, debt and exchange traded products offering businesses access to Europe’s most liquid pool of capital and AIM, the world’s leading market for growth companies. Since its launch in 1995 AIM has helped 3,500 companies raise £87 billion. London Stock Exchange is a wholly owned subsidiary of London Stock Exchange Group (LSEG).

26. A key focus for London Stock Exchange in the UK’s withdrawal has been with regard to the implications of the Markets in Financial Instruments Regulation (MiFIR) – notably the Share Trading Obligation (STO) introduced under article 23(1) of that regulation.

27. The STO is a requirement for EU investment firms to ensure that the trades they undertake in shares admitted to trading on a regulated market, or traded on a trading venue in the EU, 4 take place on a regulated market, MTF or systematic internaliser in the EU or a third-country trading venue that is considered to be equivalent to a regulated market by the European Commission. The European Securities and Markets Authority (ESMA) confirmed in November 2017 that whenever an EU investment firm is part of the transmission of an order in a share subject to the STO, they should ensure that the ultimate execution of that order complies with the requirement under MiFIR Article 23.

28. On 19 March 2019, ESMA published an updated legal interpretation2 about the STO together with a list of EU27 and GB ISINs3 subject to the STO, and this was followed by a revised statement with a further revised legal interpretation4 on 29 May 2019 which changed the scope and criteria for determining which shares are included in the STO.

29. Both statements were followed by FCA statements5 highlighting the risk of an uncoordinated approach, potentially conflicting obligations and stating its readiness to engage constructively with ESMA and other European authorities. We consider that the scope continues to be wide ranging and includes EU ISINs which have significant, or indeed their only, liquidity on London Stock Exchange. We consider there may be many unintended consequences for the ability of market participants, in particular EU27 firms and their clients, to manage their portfolios and risk positions and to achieve best execution. This obligation was put in place to benefit end- users and requires that the investment firm must select the execution location that offers the highest probability of the best possible result for the client. There will also be implications for the cost of capital for affected firms and additional costs for .

30. London Stock Exchange believes that mutual equivalence between the UK and EU would be the best solution to eliminate uncertainty and costs for market participants posed by the STO. The UK economy, as well as the financial and professional services sector, benefit from a strong and vibrant equity markets ecosystem in the UK. The UK is uniquely able to support access to capital for companies from all over the world and this a key competitive strength for London as a . The ecosystem is comprised of a complex mix of institutions (exchanges, other trading platforms including pan European MTFs, buy-side, sell-side and other intermediaries, legal and other professional advisers) underpinned by a strong legal and regulatory framework.

31. London Stock Exchange continues to seek an appropriate equivalence decision to avoid the operational, legal risks and market distortion that could otherwise occur. Given the UK has fully onshored the MiFIR regime (and the related MiFID II6) and this will be reflected in UK law immediately after exit day, an equivalence determination should be straightforward. We would also note that equivalence decisions have already been confirmed for the United States, Australia and Hong Kong.

2 https://www.esma.europa.eu/press-news/esma-news/esma’s-application-trading-obligation-shares-following- no-deal- brexit-0 3 The International Securities Identification Number (ISIN) is a global standard used to identify specific securities. 4 https://www.esma.europa.eu/press-news/esma-news/esma-adjusts-application-trading-obligation-shares-in- no-deal- brexit 5 https://www.fca.org.uk/news/statements/fca-statement-share-trading-obligations and https://www.fca.org.uk/news/statements/fca-update-share-trading-obligations 6 Markets in Financial Instruments Directive II 5 32. In February 2020, the European Securities and Markets Authority (ESMA) published a consultation document7 as part of the EU’s review of the MiFID II/ MiFIR regime. A section of that document discusses the STO with a focus on its scope and the potential impact on the liquidity of EU shares. The paper recognises that the approach currently taken to scope may have detrimental impacts on liquidity for EU shares and seeks views on how to address this.

33. Whilst the impact of the STO has not yet been felt in relation to the UK/EU relationship, other than in the form of the current uncertainty it causes, we did see it come into sharp focus in 2019 in the context of the EU and Switzerland. In June 2019, the European Commission allowed a time-limited equivalence determination, relating to Switzerland, to lapse, resulting in EU shares being prohibited from trading on Swiss trading venues. The retaliatory decision by the Swiss authorities to prohibit Swiss shares from trading on EU trading venues had direct implications on London Stock Exchange Group. As a result of the action, on 1 July 2019, Turquoise, the European multilateral trading facility majority owned by London Stock Exchange Group in partnership with the user community, removed 225 equity securities with “CH” ISINs, denoting a Swiss registered or domiciled issuer, from trading.

Future priorities

34. A priority for post-Brexit UK in financial services should be ensuring a well-functioning and cooperative relationship with the EU. UK has developed over many years as part of the EU, and there remains significant cross-border trade between the UK and the EU-27. A well-functioning regulatory arrangement between the UK and EU would be good for financial stability, market operations, and ultimately for the end-users on both sides who will be able to benefit smoothly operating, deep and liquid markets.

35. More broadly, and in addition to ensuring a well-functioning relationship with the EU, LSEG encourages the government to further develop links with other jurisdictions and international markets. LSEG welcomed HM Treasury’s announcement, in 2018, to create a series of Global Financial Partnerships (GFPs) to bring together governments, regulators and industry to build an enhanced framework for cross-border financial services. In our original submission we recommended taking into account the following seven general principles for future financial partnerships with other jurisdictions: o Transparency and certainty based on technical standards o Creating a level playing field by eliminating or mitigating barriers o Increasing the competitiveness of UK markets and Open Access o Maintaining and enhancing effective regulatory cooperation o Increasing regulatory coherence and trust between supervisors o Global alignment and consistency with G20 and IOSCO principles o Information sharing

36. We believe that well-functioning and open global markets are key to economic growth

7 https://www.esma.europa.eu/sites/default/files/library/cp_review_report_transparency_equity_dvc_tos.pdf 6 that helps support businesses and communities. We believe this should remain a priority for the government.

March 2020

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