Client segregation and portability under EMIR

 


 

 

 

Client segregation and business models - any links?

 

 

Voluntary clearing notwithstanding, the increasing scope of the clearing obligation will more and more become regulatory driver, forcing firms to sistemically rethink their market access strategies.

 

In this context it is useful to remind, counterparties may meet the clearing obligation imposed by EMIR as a direct clearing member, client of a clearing member or indirectly through a clearing member.

 

The side effect of EMIR provisions is derivatives market participants are compelled to precisely identify their strategic needs as regards access to the central counterparties (CCPs).

 

When it comes to the latter issue the entities covered will have to choose first between CCPs or clearing members/clients as their service provider model.

 

To cope with this task the identification of the accepted counterparty risk level and the consequent assessments of available options regarding accounts' segregation (with the corresponding protection level), operational efficiency, etc. will be necessary.

 

The type of segregation regime "defines the conditions and the likelihood of transfer or liquidation, and more generally the level of protection for the clients and where relevant indirect clients. The main aspects of such protection are the posting of surplus collateral directly with the CCP, the portability and the direct return of assets" (ESMA's EMIR Review Report of 13 August 2015 - Review on the segregation and portability requirements (2015/1253)).

 

 

Types of client segregation under EMIR

 

 

EMIR does not allow the use of unsegregated accounts. Article 39(2) and 39(3) of EMIR provide that CCPs must offer both 'individual client segregation' and 'omnibus client segregation' (these terms being defined in Articles 39(2) and 39(3) of EMIR).

The guidance from the European Securities and Markets Authority (ESMA) underlines that while CCPs might offer other levels of protection in addition to individual client segregation and omnibus client segregation (e.g. an omnibus gross margin client model), omnibus client segregation is the minimum level of client protection that can be used under EMIR.

ESMA's EMIR Q&A made, moreover, a clearance on whether CCPs are required to provide segregated accounts for indirect clients (i.e. clients of the clients of the clearing members).

 

The regulators' stance is the CCP may, at the request of a clearing member, set up individually segregated accounts in which the positions and assets of indirect clients of a client may be recorded, but there is no obligation to do so.

Transit-risk-client-segregation-emir 

It should be noted, however, as explained by the ESMA Q&A updated on 11 February 2014 (ESMA/2014/164), the provisions of Article 4 of EMIR and Article 2 of Commission Delegated Regulation (EU) No 149/2013 on indirect clearing apply only to OTC derivatives and not to all products (this is on account of they are lodged within Article 4 of EMIR and are said to be for the purpose of meeting the clearing obligation).


The noteworthy observation is included in the ESMA Final Report Draft technical standards on the Clearing Obligation – Interest Rate OTC Derivatives of 1 October 2014 (ESMA/2014/1184) which reads: "ESMA is aware that, as of today, there does not appear to exist any offer for indirect client clearing.

 

ESMA is considering the reasons for this lack of offer, including the commercial incentive and the existence of some legal impediment to provide indirect clearing services in accordance with the requirements of the RTS on OTC Derivatives."

 

It follows, Articles 2-5 of the Commission Delegated Regulation No 149/2013 on indirect clearing are lacking in practical significance at the moment. Moreover, the reasons for the absence of credible offers for indirect client clearing can also be easily identified.

Presumably, the problem is involved, among others, with serious legal risks threatening this kind of service, which are multiplied by jurisdictional specificities of the EU Member States insolvency laws (see below).

 

Omnibus client segregation 

 

EMIR Article 39(2) wording requires for the omnibus client segregation that the CCP keeps separate records and accounts enabling the clearing member to distinguish the assets and positions of the clearing member from the assets and positions held for the account of its clients.

 

Simply put, in this option the client account is fully segregated from the house account, but the positions of the non-segregated clients are commingled. This is the minimum level of segregation required under EMIR. 

 

The application of this model of client segregation requires the following agreements' structure:

- an agreement at a clearing member level with a client concerned,

- relevant framework agreement between the CCP and a clearing member.

 

The view has been presented (see "Guideline for EMCF's Segregation & Portability Offering under EMIR"), this option is likely to be more economical both in terms of total margin called, settlement costs and number of collateral accounts required.

 

The account will have a single margin call and will therefore benefit from margin netting across all clients within the account.

 

The said argument is based on a market practice where the CCP generally call for margin on the basis of the aggregate positions in an omnibus client account (OSA), with the different trades being offset against each other.

 

However, one should be mindful of the distinction between between "gross omnibus" and "net omnibus" accounts (this differentiation not reflected expressly in EMIR, in practice rather) where the former are designed as accounts for which the clearing member is required to post at least the sum of the margin amounts as calculated under the CCP methodology for each client portfolio separately.

 

Accordingly, only "net omnibus" accounts are accounts which allow the clearing member to post less than this aggregate amount.

 

Read more on the gross/nett omnibus client accounts

 

Omnibus client segregation involves though, multiple legal risks, which may be to some extent mitigated by choosing another option i.e. individual client segregation.

 

Among those risks the key is that assets covering positions in an omnibus account are not exposed to losses only on positions recorded in any other account but within the account, one client's assets may be used to cover another client's positions. Hence the clients having omnibus client member account share their risks.

 

Another drawback of omnibus account represents the fact that excess collateral can be held at the clearing member level.

 

Moreover, omnibus possiblilities for netting are really interesting, but it is to be bore in mind that positions can be netted only within an omnibus account and not across accounts.

Another shortcoming, as BBA, ISDA and FOA rightly assessed, is that for net omnibus account structures, the porting of the entire portfolio of assets and positions as a unit would be very difficult and rarely work in practice (BBA, ISDA and FOA response to HMT Segregation and Portability Consultation). 

 

Individual client segregation

 

In this alternative EMIR Article 39(3) requires the CCP to keep separate records and accounts enabling the clearing member to distinguish the assets and positions held for the account of each client from those held for the account of each other client.

The main additional cost of this solution is that the individual client account (ISA) will be margined and settled separately from other accounts and will therefore not benefit from any cross client netting opportunities at margin or settlement level.

 

In practice, clients choosing the option of individual segregation are known by the CCP, while the omnibus clients may be not. An example is the European Commodity Clearing AG (ECC), which distinguishes the two above types of clients using the following criteria:


- non-clearing member is a client of a clearing member that has signed a trilateral clearing agreement ("NCM-Agreement") with ECC and a clearing member, is known to ECC and its positions are recorded separately from those of the clearing member or other non-clearing members and clients in ECCs systems,


- client of a clearing member, which has not signed an NCM-Agreement, clears transactions through its  clearing member and is not known to ECC. Its transactions are recorded separately from its clearing member positions and those of other clearing members but are commingled with the positions of other clients in the same account. 

 

Also under Eurex Clearing arrangements for Individual Clearing Model clients are disclosed to the Eurex Clearing while under the UK CASS Compliant Omnibus Model are not, and apply for segregation with its clearing members.

 

The implementation of this model of client segregation requires a tripartite agreement between the CCP, clearing member and a non-clearing member.

 

 

Obligations of investment firms acting as general clearing members as regards disclosure of information about different levels of segregation

 

 

Investment firms acting as general clearing members are required to inform its prospective and existing clearing clients of the levels of protection and of the costs associated with the different levels of segregation offered (information must include a description of the main legal effects of the respective levels of segregation, including information on the insolvency law applicable in the relevant jurisdiction).

 

The legal base for the said requirements is Article 27(2) of the Commission Delegated Regulation (EU) 2017/589 of 19 July 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the organisational requirements of investment firms engaged in algorithmic trading.

 

 

Porting definition pursuant to EMIR

 

 

Porting under EMIR rules can be defined as the transferring of client positions and assets on the default of a clearing member to another clearing member designated by the client, the CCP must commit to on the client's request and without the consent of the defaulting clearing member.

 

This definition applies equally to omnibus and individually segregated accounts, with the distinction that in the case of omnibus client segregation the back-up clearing member must be designated by all clients.

 

The important reservation is the new clearing member is only required to accept the positions and assets if it has previously committed to do so.

 

 

Porting preconditions

 

 

The clients' request constitutes the sine qua non precondition for trigering procedures for porting as required under EMIR. Practically, the said request may be also effected by the trustee on behalf of all clients in an omnibus account.

Other preconditions for porting of positions and collateral held under individual or omnibus client segregation include:

 

1. The existence of alternative clearing arrangements for the client(s) with a back up clearing participant as required under the clearing rules;

 

2. The acceptance of the back-up clearing participant of all positions (the CCP may require such acceptance to be unconditional).

In all cases there is a need to have a back-up clearing broker that has agreed to accept the CCP transactions.

 

Theoretically, it would appear sensible to appoint a back-up clearing broker upfront as part of clearing arrangements but, as was observed by the industry, the back-up clearing broker is unlikely to be able to confirm that it is willing to accept the CCP transactions until the default occurs.

 

One should be also mindful of the fact that the back-up clearing broker may also have conditions that client must meet.

 

Final Report on the clearing obligation for financial counterparties with a limited volume of activity, 14 November 2016, ESMA/2016/1565 (p. 9) observes in that regard:

 

"However, finding a back-up clearing member also proves to be challenging for the same reasons as the ones developed above for the main clearing member. Furthermore, clearing members are reported to be unwilling to act as pure backup clearing members, as this results in negative regulatory capital implications without any corresponding revenue. The preferred model is to have two active clearing members, each acting as backup of the other. Hence there is a plea for changes to the regulatory capital rules to be more supportive of "cold standby" backup clearing members unless and until positions are ported to them at a later stage."

 

In practice, the CCP rules may involve further operational safeguards enabling the CCP to retain legal safety of the whole process and mitigate potential legal risks. Among these CCP-specific points may appear:

 

1. legal opinion on file on the on-going validity of authority to port granted by the defaulting clearing participant and the (non) applicability of anti-deprivation and/or voidance rules,

 

2. the written consent of the insolvency practitioner appointed for the defaulting clearing participant.

 

Sometimes CCP may impose additional requirements involving the satisfactory certainty that all pending settlements with the defaulting clearing participant will be cancelled, and that new equivalent instructions with the back up clearing participant will settle with good value (like the above EMCF rules).

 

Under LCH.Clearnet rulebook should a clearing member default, LCH.Clearnet declares it will work with clients to transfer positions and assets to an alternative clearing member, however, achieving a transfer is not guaranteed.

 

For LCH.Clearnet optimum conditions to achieve client porting include:

 

- the client being known to LCH.Clearnet and fully identified (i.e. not in an anonymous account),


-the client having established a clearing relationship with an alternative clearing member,

 

- the client nominating an alternative clearing member within the time specified by LCH.Clearnet,


- the nominated alternative clearing member accepting the client's porting request,


- the client having over-collateralised its account.

 

When it comes to the practical functioning of its porting mechanisms LCH.Clearnet refers to the recent events (November 2011) involving MF Global case, where, as the LCH.Clearnet declares, over 300 client positions were transferred to the clearing member of clients' choice.

 

 


 

 

 

 

Porting scope - back-to-back client trades excluded

 

 

Articles 48(5) and 48(6) of EMIR which deal with porting (see below), require the CCP to "contractually commit" to trigger a transfer to the non-defaulting clearing member where the clients of the defaulting clearing member request the transfer and have in place a contractual arrangement with the non-defaulting clearing member which commits him to accept a transfer.

 

Articles 48(5) and 48(6) of EMIR refer back to assets and positions held in accounts in accordance with Articles 39(2) and 39(3), which are accounts at the CCP, hence the above transfer can only affect the assets and positions held at the CCP:

 

Consequently, the basic provisions of EMIR only envisage porting of the margin and positions held in accounts at the CCP. They do not provide for the transfer of any margin (or back-to-back client trades) held by the defaulting clearing member for its underlying clients. The said interpretation is shared by BBA, ISDA and FOA (see the above-mentioned BBA, ISDA and FOA response to HMT Segregation and Portability Consultation).

 

Therefore, assets provided by the client to the clearing member as margin are at the so-called "transit risk" prior to transferring such assets to the CCP.

 

The risk for the client consists in the danger to loose assets provided by the client to the clearing member on account of the CCP margin if the clearing member was to default prior to providing such client assets to the CCP, this is since the assets that were intended to be recorded in the client account at the CCP will not benefit from EMIR protections before reaching CCP.

 

The issue arises whether such risk may be avoided. Generally the said risk originates in the "principal-to principal" clearing model. However, if margin is called by the CCP before clearing member is able to acquire relevant funds from its clients and, in effect, clearing member uses its own funds to satisfy the CCP margin call, the client is obviously protected.

 

In such situation clearing member is forced to recover such amounts from its clients only later - which results in clearing member exposition to its clients. The opposite arrangement will, however, be more common in practice.

 

 

Interpretational issues with respect to "assets"

 

 

The term: "assets" contained in Article 39(10) of EMIR raised some ambiguities in the practical application.

 

It is argued (ESMA's EMIR Review Report of 13 August 2015 - Review on the segregation and portability requirements (2015/1253)), Article 39(10) of EMIR lacks details as to the nature of records that should be implemented by the CCP and clearing members and whether they should only be reflecting the nominal value of the "asset" when deposited or the precise description and characteristics of such assets.

 

Moreover, the reference to assets "held to cover positions" could lead to the exclusion of "buffers" left by clients to clearing members and which can fulfil several purposes and cover different type of activities.

 

As such, until they are allocated, the assets do not cover specific positions and would thus not benefit from the protection foreseen in Article 39 and 48 of EMIR.

 

It was also unclear whether variation margin fell under the definition of assets.

 

 

EMIR porting requirements vs. insolvency law

 

 

Although EMIR, which took the form of the EU regulation, is directly applicable in all EU Member States, there appears to be a need for specific EMIR porting requirements' recognition under national laws on the insolvency of a clearing member. 

 

There are concerns that relying solely on the EMIR provisions is not sufficient to provide explicit protection from national insolvency law for certain transfers. The above BBA, ISDA and FOA response to HMT Segregation and Portability Consultation made the two important general, practical observations:

 

1) that the UK and European clearing houses and clearing members generally apply the principal-to-principal model for clearing (let's add that under the said approach the clearing rules do not create a contractual relationship between the CCP and the clients of the clearing member), and

 

2) where the defaulting clearing member is acting as principal the general market practice is that clearing members would not net or offset positions across clients, so there would always be a one-to-one correspondence between a client trade and the position at the CCP (the one-to-one position may, however, not extend to margin, which may be calculated by the CCP on the basis of the aggregate positions in an omnibus account, i.e. the CCP margin call toward the clearing member could be reduced due to offsetting trades between different clients of the clearing member).

 

The above factual circumstances can be contrasted with legal conclusions that:

 

1) EMIR does not provide for the porting of the underlying client back-to-back trades with clearing members (client trades), which arise where the clearing member is acting as principal, and the associated margin held by the clearing member,

 

2) there is a need for checking whether the principal-to-principal relationships and the porting of the connected underlying client trades (the 'client trade') should not also be recognised under Member State's national insolvency law.

 

There are also concerns whether the provisions in EMIR would, without more, override provisions of national insolvency law in relation to the transfer of assets and positions which might legally belong to a defaulting clearing member (DCM).

 

Where the DCM deals as principal with the CCP then margin and positions at the CCP, even if relating to client trades, will technically be the property of the DCM. A transfer of those positions and assets by a provision of a private law contract (such as the membership rules of the CCP) could constitute a void disposition under Member State's national insolvency law.

 

Hence, the optimal solution would be to provide through the relevant amendments to the national law a mechanism to transfer both assets and positions at the CCP, as well as corresponding margin and client trades with the DCM, in a way which should protect those transfers under Member States' national insolvency law.

 

Considering, however, the territorially-restricted character of each of Member States' national laws, the relevant protections included therein may only apply in relation to a DCM which is subject to insolvency law of that particular national law. The same will apply also to the CCP.

 

The above BOA, ISDA and FOA response made the point that the position is less clear where either the clearing member or the CCP is located in another jurisdiction than the one the clearing member client is subject to.

 

Referring to the relevant EMIR-implementation legislative initiative on the ground of the UK law, the above-mentioned analysis highlighted that it would appear that transfers of assets and positions belonging to a non-UK DCM would not be protected if the insolvency law of the clearing member's jurisdiction of incorporation or establishment did not provide an equivalent to the UK law level of protection from the applicable insolvency law.

 

Continuing the example of the UK insolvency law, tha above organisations also observed that transfers by the CCP pursuant to its default rules might be subject to challenge under the insolvency law applicable to the non-UK clearing member.

 

The method for introducing the comprehensive and complementary legislative EMIR insolvency solutions at the level of each Member State (taken separately) appears burdensome, thus in the joint opinion of the above organistations requirement imposed at EU level on member states to protect the porting of assets and positions (both at the CCP level and the level of the clearing member) from the effects of member state insolvency law should be considered.

 

Another area of potential discrepancy between EMIR and insolvency laws are circumstances where individually segregated client collateral is held in the books of CCP and EMIR requires that collateral balances owed by CCP after completion of default procedures, i.e. unused collateral, must be readily returned to the client if known to CCP.  

Legal risk involved is that the national insolvency law may allow the payment of such residual collateral provided, the insolvency practitioner of the defaulting clearing participant expressed its consent.

The potential mitigant for such risk may be a pledge agreement with the clearing participant as pledgor and the client as pledgee.

 

The aforementioned ESMA's Report of 13 August 2015 contains the following ESMA's recommendations for future amendments of EMIR (p. 10): "the provisions of Article 39 of EMIR should be specific on the effects for the different accounts following the clearing member default, i.e. if assets shall be ported or proceeds directly returned to clients, the Article should specify that this is the case and that the insolvency administrator of a clearing member shall not prevent this from happening. This would clearly state the supremacy of an EU Regulation over national insolvency laws, rather than a simple reference in a recital."

 

See below an excerpt from the aforementioned ESMA Report (p.12):

 

Emir-segregation-portability-insolvency-esma

 

 

 

 

The European Commission Proposal of May 2017 for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories (COM(2017)208, p. 15) inserted a new paragraph to EMIR Article 39 to clarify that assets covering the positions recorded in an account are not part of the insolvency estate of the CCP or clearing member that keeps separate records and accounts.

 

 

Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories, COM(2017)208, May 2017

 

In Article 39, the following paragraph 11 is added:

 

“11. Where the requirement referred to in paragraph 9 is satisfied, the assets and positions recorded in those accounts shall not be considered part of the insolvency estate of the CCP or the clearing member.”

 

Recital 18

 

Uncertainties remain as to what extent assets held in omnibus or individual segregated accounts are insolvency remote. It is therefore unclear in which cases CCPs can with sufficient legal certainty transfer client positions where a clearing member defaults, or in which cases CCPs can, with sufficient legal certainty, pay the proceeds of a liquidation directly to clients. To incentivise clearing and to improve access to it, the rules relating to insolvency remoteness of those assets and positions should be clarified.

 

This provision is intended to offer certitude to those who provide clearing services or offer their clients the possibility to provide such services that they can fulfil their commitments with regard to the EMIR default management procedures as well as to incentivise them to provide access to central clearing of OTC derivatives contracts as a service.

 

Equally the provisions offer certitude to clients and indirect clients that in the case of default of a clearing member or a client providing clearing services, their assets are protected and can, thus, be ported to other clearing members or clients that provide indirect clearing services.

 

However, FIA Response of 18 July 2017 to the European Commission EMIR Review Proposal – Part 1 (REFIT Proposals) recommends that:

 

- the above Proposal for the draft Regulation be extended to address indirect clearing arrangements: direct clients providing indirect clearing services should also be required to hold client collateral on a bankruptcy remote basis and the Proposal should clarify how clearing members should treat the assets and positions of their clients in the event of a client default (when their direct clients are providing clearing services to indirect clients);

 

-  the said Proposal should not cover the situation of a CCP default (since CCP resilience, recovery and resolution should be solely addressed in a separate EU regulation).

 

 

Territorial scope of requirements on clearing members pursuant to EMIR

 

 

The requirements on clearing members that are established in EMIR (e.g. those in Articles 38 and 39 of EMIR) apply to clearing members of all CCPs established in the European Union.

 

ESMA's Q&A of 11 November 2013 clarified that the non-EU clearing members of EU CCPs providing services to EU clients are also subject to the segregation requirements in Article 39. 

 

References to clearing members in Article 39 are not limited to EU clearing members, so all clearing members of EU CCPs are required to comply. CCPs are expected to require all clearing members to comply with the relevant EMIR provisions through their rules.

 

On the other hand, EU clearing members of non-EU CCPs are not required to comply with Article 39 when offering client clearing on non-EU CCPs.

 

However, EU clearing members will only be allowed to be a clearing members of a non-EU CCP which has been recognised as meeting equivalent requirements to EMIR under the process set out in Article 25 of EMIR. This will include an assessment of the CCP's segregation arrangements.

 

The version of 10 July 2014 of ESMA's Q&As has added that, similarly, the references to clients in Article 39 are not limited to EU clients.

 

 

Porting agreements pursuant to EMIR

 

 

As cited above, Article 48(5) and 48(6) of EMIR require the CCP to "contractually commit" to trigger a transfer to the non-defaulting clearing member where the clients of the defaulting clearing member request the transfer and have in place a contractual arrangement with the non-defaulting clearing member which commits him to accept a transfer.

 

To account for the above EMIR requirement it may be useful to differentiate the following kinds of agreements that may be needed to arrange for the relevant transfers and settlements:

 

1. Firstly, the wording of EMIR expressly makes a referrence to the agreement between clients of the defaulting clearing member on the one part and the non-defaulting clearing member on the other, the object of the said agreement being the commitment of the non-defaulting clearing member to accept a transfer of the assets and positions held by the defaulting clearing member for the account of its clients.

 

A practical remark has been made that it would make sense for the defaulting clearing member to also be a party to these arrangements.

 

2. Secondly, "contractual commitment" required of the CCP by Articles 48(5) and 48(6) of EMIR will most likely be implemented in the CCP internal regulations and automatically, in the clearing member admission legal documentation, however in relation to the transfer of client positions and associated margin registered with the CCP this may not matter as the provisions of EMIR are be directly applicable.

 

Taking practical examples into account under the European Commodity Clearing AG (ECC) rules (see "ECCs approach to Segregation and Portability") legal basis for individual segregation is the collateral agreement for the passing through of collateral (NCM07) which has to be signed by the non-clearing member (NCM) requesting segregation, his clearing member and ECC.

 

Additionally a Close-out Netting Agreement has to be signed between the clearing member and the segregated non-clearing member as a precondition for the segregation.

 

As all non-clearing members already have separate position accounts, no further technical setup is required for individual segregation of positions, as a segregated non-clearing member position account is technically identical to a regular account for this type of membership.

 

3. The third situation involves contractual arrangements for the potential transfer of the client trades between the defaulting clearing member and its clients and any associated excess margin held by the defaulting clearing member.

 

As mentioned above, EMIR does not provide for such transfers, however the EU Member State's national law may additionally protect the legitimate interests of clearing member's clients and expressly require the default rules of a CCP to include provisions that would enable it to require the transfer of client trades and associated excess gross margin from a defaulting clearing member to a non-defaulting clearing member where the corresponding client positions and margin at the CCP are being transferred and, in respect of the excess gross margin, the parties have agreed that this should also be ported.

 

This case in turn in practice likely require multilateral agreements between the CCP, defaulting clearing member, non-defaulting clearing member and each of its clients to enable the novation of client positions and client trades, and the transfers of margin, from the defaulting clearing member to the non-defaulting clearing member.

Technically, if porting is achieved, client transactions with the defaulting clearing member will in most cases terminate in accordance with client clearing agreement and the client will have to put in place with back-up clearing broker new client transactions.

 

 

Specific situations

 

 

In Q&As as updated on 20 March 2014 ESMA expressed its positive, under certain circumstances, opinion on the provision in the CCP rules and/or operating procedures under which the CCP can, if so requested by a clearing member, transfer the positions and assets held for the account of a defaulted client of that clearing member from the segregated account holding those positions and assets into the house account of the clearing member to facilitate the management of the client default by the clearing member.

 

ESMA has explained that it is the responsibility of the clearing member to inform the CCP of the account to which positions and assets held by the clearing member should be allocated.

 

The contractual arrangement between a clearing member and its client may provide for the positions and assets held for the account of the client to be transferred to the house or proprietary account of the clearing member in the event of a default of the client.

 

Accordingly, pursuant to ESMA, there should be no restriction on the ability of a CCP to transfer the positions and assets held for the account of a defaulted client into the house account of the clearing member on instruction of that clearing member, subject to that clearing member not being in default itself and in accordance with any applicable valuation and other rules and/or operating procedures of the CCP.

 

This existence of such a process should be clearly disclosed by CCPs and clearing members; for example, as required by Article 39(7) of EMIR and would need to be compatible with the applicable insolvency law.

 

 

Date of implementation of requirements for individual client segregation and portability

 

 

The requirements on clearing members for individual client segregation and portability that are established in EMIR (e.g. those in Articles 38 and 39 of EMIR) apply to clearing members of all CCPs established in the European Union. These obligations therefore come into force at and should be met by the time that the CCP is authorised under EMIR (see ESMA Q&As on EMIR (CCP Question 8(c) below).

Given the authorisation under EMIR Regulation of Nasdaq OMX Clearing AB by the Finansinspektionen in Sweden as the first EU-based CCP on 18 March 2014 the relevant requirements on clearing members of Nasdaq OMX (e.g. those in Articles 38 and 39 of EMIR) came into force on 18 March 2014.

 

It follows that the requirements will start its application with respect to clearing members of other clearing houses with further developments as regards the CCP registration process (the procedures are pending, other dates of CCP authorisation see here).

 


 

 

 

Main dilemma for clients - which type of account to choose

 

 

In summary, the main effects of segregation are:

 

a. Separate accounts

 

The assets and positions must be recorded in separate accounts:

 

- in the case of individual client account - for every client,

 

- in the case of omnibus client account - for clearing member house settlements and client trades.

 

b. Netting impossible 

 

The netting of positions recorded on different accounts is prevented.

 

c. No exposition to losses in other accounts

 

The assets covering the positions recorded in an account are not exposed to losses connected to positions recorded in another account.

 

An example for practical application of those rules is given by the Eurex Clearing, which declares on its website that potential losses from a clearing member's default are covered by the existing Eurex Clearing lines of defense and segregated client collateral "will be completely ring-fenced and will not be set-off with losses of a clearing member or other clients".

 

In that regard regulatory guidance from ESMA explained, however, that the account at the CCP must identify the specific assets (e.g. the particular or equivalent securities) due to the account of the client and it is not sufficient that it identifies only the value due to that account, alternative approaches to segregation that identify only the value due to the accounts of the clients (while recording the assets provided for the account overall) may be offered only in addition.

 

The said EMIR rule has also once more interesting effect, namely where a clearing member desires to use its own assets (i.e. assets that were not posted by a client of the clearing member) to fulfil the margin requirements of the client account, then such assets could be recorded in a client account at a CCP, however in doing so the assets would be treated as assets held for the account of clients of the clearing member. This would mean that upon a default of the clearing member, the assets would be exposed to losses connected to the client account in which the assets were recorded and could no longer be used to meet any losses on the defaulted clearing member's house account(s). This interpretation has been acknowledged by ESMA in regulatory guidance.

 

d. Excess margin posted to the CCP

 

When a client opts for individual client segregation, any margin in excess of the client's requirement must also be posted to the CCP and distinguished from the margins of other clients or clearing members and must not be exposed to losses connected to positions recorded in another account.

 

Referring to Article 39(6) of EMIR (which states that when a client opts for individual segregation any margin in excess of the client's requirement shall be posted to the CCP) ESMA underlined, any excess collateral allocated to an individually segregated account must either be maintained at the CCP in accordance with article 39(6) or returned to the client.

 

In this context the two factual circumstances have been distinguished by the European financial regulator, which stressed that CCPs should offer clearing members the possibility of holding excess margin allocated to an individually segregated account at the CCP in that account (i.e. switching off auto repay), provided that the CCP can hold the currency in which the cash variation margin is denominated overnight in compliance with the CCP's investment policy.

 

In turn, when variation margins are denominated in currencies that the CCP cannot hold overnight (e.g. because it has no overnight investment facilities for such currencies - typically, currencies not accepted for initial margins), the CCP has no obligation to accommodate these currencies and the clearing member is required to return the collateral to the client, unless the latter, via a documented request, instructed the clearing member to hold the client's repaid variation margins in a non-clearing account meeting the relevant conditions.

 

Regulatory guidance from ESMA made also clear that variation margin payments, representing amounts of margins called by the CCP are required to be recorded in separate records and accounts maintained for the individually segregated client at the CCP.

 

However, this requirement does not imply that payment instructions must be made for every individually segregated account separately. CCPs may therefore issue one payment instruction for multiple accounts at the same time, so long as they issue separate margin calls for each account (house, omnibus client, individually segregated client account) and correctly record these margin calls, and the payments which correspond to them, in the records of each account.

 

Referring to other potential issues it is noteworthy that EMIR provisions on segregation and margin also call into question, because of how margin amounts are calculated and irrespective of legal challenges, the CCP interoperability arangements for cross-margining under which two (or potentially more) CCPs set margin requirements on the basis of the portfolio of positions that a clearing member holds across the two CCPs.

 

e. Ability to port the CCP transactions

 

The type of account and level of segregation have an impact on the ability to port CCP transactions and assets to a back-up clearing broker upon clearing member's default (for more comprehensive description of porting rules see below).

If client chooses an omnibus client account, in most cases, all clients who have CCP transactions and assets relating to them recorded in the same omnibus client account will have to agree to use the same back-up clearing broker, and the back-up clearing broker will have to agree to accept all of the CCP transactions and assets recorded in that omnibus client account.

Since, it would be rather to be difficult to achieve porting in relation to an omnibus client account.

If client arranges for an individual client account, it would make more sense because the client can appoint a back-up clearing broker with respect to just its CCP transactions and the related assets.

 

f. Close-out settlements

 

Given that the identity of the client is more likely to be known to the CCP in the case of individual client account, if the CCP terminates the CCP transactions and performs a close-out calculation in respect of them in accordance with the CCP rules, it is likely that the CCP will be able in the case of individual client account to pay any resulting positive difference directly to the client. 

 

If the CCP does not know client identity and/or does not know how much of the amount relates to the client (what is more probable with respect to the omnibus client account), the CCP will pay to the defaulting clearing member (or its insolvency practitioner) for the account of its clients (however, practically, such sums are under serious risk to be entirely or partially lost for the client). So, this is an argument supporting the individual client account option.

 

g. Fees, charges and costs

 

Although having indisputable merits in terms of legal protection, individual client segregation is likely to be involved with additional CCP charges to cover the extra administration and monitoring required (such additional costs envisioned for instance by the EMCF). The use of different types of account may involve different costs or levels of collateral requirement, thus the lacking netting opportunities for the individually segregated client, both margin and settlement level, should also be weighed up.

 

In general terms, the clearing participant's decision on the choice of the type of collateral and positions segregation need to pose a risk-appetite's reflection and be based on individual assessments. It is likely, however, that the omnibus client segregation as the minimum level of segregation required (separate house and client position and collateral accounts) will in practice represent the standard CCP membership service while the individual segregation will pose a product tailored to specific needs of clients.

 

For omnibus clients segregation risks see also: Omnibus client account.

 

 

Legislative tendencies with respect to EMIR provisions on segregation nad portability

 

 

See below an excerpt from the aforementioned ESMA EMIR Review Report - Review on the segregation and portability requirement (2015/1253), p.11:

 

EMIR-legislative-tendencies 

 

ESMA Discussion Paper of 26 August 2015, Review of Article 26 of RTS No 153/2013 with respect to client accounts (ESMA/2015/1295) in turn analyses the possibilities for greater security for clients in relation to porting, with a view to mitigating the risks of losses on the default of its clearing member. 

 

According to ESMA, it could be considered that each client must have an existing arrangement with a secondary clearing member whereby the latter irrevocably agreed that the client's assets and positions are ported to it from the client's primary clearing member in case of the latter's default, and that the CCP has all the operational arrangements in place to transfer the positions and the assets within a day.

 

 

MiFID/MiFIR approach

 

 

The above considerations relate to OTC derivatives, where the respective requirements are set in the EMIR itself as well as in Commission Delegated Regulation No 149/2013 (EMIR RTS).

 

However, EMIR RTS currently in force serves as the baseline in relation to the proposed framework for indirect clearing arrangements with regard to exchange-traded derivatives (ETDs), which are to be established under the empowerment of Article 30 of MiFIR.

 

In addition, the MiFIR empowerment specifies that consistency should be ensured between the requirements for indirect clearing arrangements with regard to exchange-traded derivatives and the requirements for indirect clearing arrangements with regard to OTC derivatives as per EMIR RTS.  

 

To manage all respective interdependencies Consultation Paper Indirect clearing arrangements under EMIR and MiFIR of 5 November 2015 (ESMA/2015/1628) has been issued by ESMA.

 

 

 

EMIRArticle 39

 

Segregation and portability

 

1. A CCP shall keep separate records and accounts that shall enable it, at any time and without delay, to distinguish in accounts with the CCP the assets and positions held for the account of one clearing member from the assets and positions held for the account of any other clearing member and from its own assets.

 

2. A CCP shall offer to keep separate records and accounts enabling each clearing member to distinguish in accounts with the CCP the assets and positions of that clearing member from those held for the accounts of its clients ('omnibus client segre­gation').

 

3. A CCP shall offer to keep separate records and accounts enabling each clearing member to distinguish in accounts with the CCP the assets and positions held for the account of a client from those held for the account of other clients ('individual client segregation'). Upon request, the CCP shall offer clearing members the possibility to open more accounts in their own name or for the account of their clients.

 

4. A clearing member shall keep separate records and accounts that enable it to distinguish both in accounts held with the CCP and in its own accounts its assets and positions from the assets and positions held for the account of its clients at the CCP.

 

5. A clearing member shall offer its clients at least, the choice between omnibus client segregation and individual client segregation and inform them of the costs and level of protection referred to in paragraph 7 associated with each option. The client shall confirm its choice in writing.

 

6. When a client opts for individual client segregation, any margin in excess of the client's requirement shall also be posted to the CCP and distinguished from the margins of other clients or clearing members and shall not be exposed to losses connected to positions recorded in another account.

 

7. CCPs and clearing members shall publicly disclose the levels of protection and the costs associated with the different levels of segregation that they provide and shall offer those services on reasonable commercial terms. Details of the different levels of segregation shall include a description of the main legal implications of the respective levels of segre­gation offered including information on the insolvency law applicable in the relevant jurisdictions.

 

8. A CCP shall have a right of use relating to the margins or default fund contributions collected via a security financial collateral arrangement, within the meaning of Article 2(1)(c) of Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrange­ments provided that the use of such arrangements is provided for in its operating rules. The clearing member shall confirm its acceptance of the operating rules in writing. The CCP shall publicly disclose that right of use, which shall be exercised in accordance with Article 47.

 

9. The requirement to distinguish assets and positions with the CCP in accounts is satisfied where:

(a) the assets and positions are recorded in separate accounts;
(b) the netting of positions recorded on different accounts is prevented;
(c) the assets covering the positions recorded in an account are not exposed to losses connected to positions recorded in another account.

 

10. Assets refer to collateral held to cover positions and include the right to the transfer of assets equivalent to that collateral or the proceeds of the realisation of any collateral, but does not include default fund contributions.

 

Draft Paragraph 11 according to the Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivatives contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories, COM(2017)208, May 2017:

 

11. Where the requirement referred to in paragraph 9 is satisfied, the assets and positions recorded in those accounts shall not be considered part of the insolvency estate of the CCP or the clearing member.

 

Article 48

Default procedures

 

1. A CCP shall have detailed procedures in place to be followed where a clearing member does not comply with the participation requirements of the CCP laid down in Article 37 within the time limit and in accordance with the procedures established by the CCP. The CCP shall set out in detail the procedures to be followed in the event the default of a clearing member is not declared by the CCP. Those procedures shall be reviewed annually.

 

2. A CCP shall take prompt action to contain losses and liquidity pressures resulting from defaults and shall ensure that the closing out of any clearing member's positions does not disrupt its operations or expose the non-defaulting clearing members to losses that they cannot anticipate or control.

 

3. Where a CCP considers that the clearing member will not be able to meet its future obligations, it shall promptly inform the competent authority before the default procedure is declared or triggered. The competent authority shall promptly communicate that information to ESMA, to the relevant members of the ESCB and to the authority responsible for the supervision of the defaulting clearing member.

 

4. A CCP shall verify that its default procedures are enforceable. It shall take all reasonable steps to ensure that it has the legal powers to liquidate the proprietary positions of the defaulting clearing member and to transfer or liquidate the clients' positions of the defaulting clearing member.

 

5. Where assets and positions are recorded in the records and accounts of a CCP as being held for the account of a defaulting clearing member's clients in accordance with Article 39(2), the CCP shall, at least, contractually commit itself to trigger the procedures for the transfer of the assets and positions held by the defaulting clearing member for the account of its clients to another clearing member designated by all of those clieNts, on their request and without the consent of the defaulting clearing member. That other clearing member shall be obliged to accept those assets and positions only where it has previously entered into a contractual relationship with the clients by which it has committed itself to do so. If the transfer to that other clearing member has not taken place for any reason within a predefined transfer period specified in its operating rules, the CCP may take all steps permitted by its rules to actively manage its risks in relation to those positions, including liquidating the assets and positions held by the defaulting clearing member for the account of its clients.

 

6. Where assets and positions are recorded in the records and accounts of a CCP as being held for the account of a defaulting clearing member's client in accordance with Article 39(3), the CCP shall, at least, contractually commit itself to trigger the procedures for the transfer of the assets and positions held by the defaulting clearing member for the account of the client to another clearing member designated by the client, on the client's request and without the consent of the defaulting clearing member. That other clearing member shall be obliged to accept these assets and positions only where it has previously entered into a contractual relationship with the client by which it has committed itself to do so. If the transfer to that other clearing member has not taken place for any reason within a predefined transfer period specified in its operating rules, the CCP may take all steps permitted by its rules to actively manage its risks in relation to those positions, including liquidating the assets and positions held by the defaulting clearing member for the account of the client.

 

7. Clients' collateral distinguished in accordance with Article 39(2) and (3) shall be used exclusively to cover the positions held for their account. Any balance owed by the CCP after the completion of the clearing member's default management process by the CCP shall be readily returned to those clients when they are known to the CCP or, if they are not, to the clearing member for the account of its clients.

 

 

 


 

 

 

Minimum level of client protection

 

Article 39(4) of EMIR requires that a clearing member distinguish, in accounts with the CCP, the clearing member's own assets and positions from those assets and positions held for the accounts of the clearing member's clients. Article 39(9) of EMIR includes further criteria which must be met by the accounts held by a clearing member with a CCP.

 

In effect, EMIR does not allow the use of unsegregated accounts. Article 39(2) and 39(3) of EMIR provide that CCPs must offer both 'individual client segregation' and 'omnibus client segregation' (these terms being defined in Articles 39(2) and 39(3) of EMIR).

 

The European financial authority ESMA in its Questions and Answers on EMIR underlined that while CCPs might offer other levels of protection in addition to individual client segregation and omnibus client segregation (e.g. an omnibus gross margin client model), omnibus client segregation is the minimum level of client protection that can be used under EMIR.

 

 

 

 

 

 

ESMA Questions and Answers


Article 48 of EMIR – Collateral portability


What is the requirement on a CCP for portability of client assets in a member default scenario – for both individual and omnibus accounts?

 

(a) Port the "required collateral" only, less outstanding variation margin payments i.e. the value of assets used to cover liabilities; or

 

(b) Port the assigned value of the assets, less outstanding variation margin payments (post-haircut); or

 

(c) Port the proceeds from liquidation of assets, less outstanding variation margin payments; or


(d) Port the assets themselves, less outstanding variation margin payments?

CCP Answer 3

Article 48 of EMIR establishes the circumstances and parameters under which a CCP must transfer the assets and positions of the clients of defaulted clearing members or may liquidate such assets and positions.


Following a member default, a CCP is required to transfer the assets and positions recorded as being held for the account of the clients of the defaulted clearing member if the conditions defined in Article 48 are met.

 

Otherwise, the CCP may try to transfer the assets and positions, on a best effort basis, but ultimately has the right to liquidate the assets and positions. If the assets of a client of the defaulted clearing members are only partially liquidated then the non-liquidated portion of the assets will be returned to the clients when they are known to the CCP or, if they are not, to the clearing member for the account of its clients.


Article 39(10) of EMIR provides that assets (in respect of segregation and portability) refers to collateral held to cover positions and includes the right to transfer assets equivalent to that collateral or the proceeds of the realisation of any collateral.

 

 


 

Articles 1(a)(b), 4 and 5 of the Commission Delegated Regulation (EU) No 149/2013 of 19 December 2012 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to regulatory technical standards on indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, and risk mitigation techniques for OTC derivatives contracts not cleared by a CCP

 

Article 1


Definitions


For the purposes of this Regulation the following definitions apply:

(a) 'indirect client' means the client of a client of a clearing member;

(b) 'indirect clearing arrangement' means the set of contractual relationships between the central counterparty (CCP), the clearing member, the client of a clearing member and indirect client that allows the client of a clearing member to provide clearing services to an indirect client;

...

 

Article 4

 

Obligations of clearing members

 

1. A clearing member that offers to facilitate indirect clearing services shall do so on reasonable commercial terms. Without prejudice to the confidentiality of contractual arrangements with individual clients, the clearing member shall publicly disclose the general terms on which it is prepared to facilitate indirect clearing services. These terms may include minimum oper­ational requirements for clients that provide indirect clearing services.


2. When facilitating indirect clearing arrangements, a clearing member shall implement any of the following segregation arrangements as indicated by the client:


(a) keep separate records and accounts enabling each client to distinguish in accounts with the clearing member the assets and positions of the client from those held for the accounts of its indirect clients;


(b) keep separate records and accounts enabling each client to distinguish in accounts with the clearing member the assets and positions held for the account of an indirect client from those held for the account of other indirect clients.


3. The requirement to distinguish assets and positions with the clearing member shall be considered to be met if the conditions specified in Article 39(9) of Regulation (EU) No 648/2012 are satisfied.


4. A clearing member shall establish robust procedures to manage the default of a client that provides indirect clearing services. These procedures shall include a credible mechanism for transferring the positions and assets to an alternative client or clearing member, subject to the agreement of the indirect clients affected. A client or clearing member shall not be obliged to accept these positions unless it has entered into a prior contractual agreement to do so.

 

5. The clearing member shall also ensure that its procedures allow for the prompt liquidation of the assets and positions of indirect clients and the clearing member to pay all monies due to the indirect clients following the default of the client.


6. A clearing member shall identify monitor and manage any risks arising from facilitating indirect clearing arrangements, including using information provided by clients under Article 4(3). The clearing member shall establish robust internal procedures to ensure this information cannot be used for commercial purposes.


Article 5

 

Obligations of clients

 

1. A client that provides indirect clearing services shall keep separate records and accounts that enable it to distinguish between its own assets and positions and those held for the account of its indirect clients. It shall offer indirect clients a choice between the alternative account segregation options provided for in Article 4(2) and shall ensure that indirect clients are fully informed of the risks associated with each segregation option. The information provided by the client to indirect clients shall include details of arrangements for trans­ferring positions and accounts to an alternative client.

 

2. A client that provides indirect clearing services shall request the clearing member to open a segregated account at the CCP. The account shall be for the exclusive purpose of holding the assets and positions of its indirect clients.

 

3. A client shall provide the clearing member with sufficient information to identify, monitor and manage any risks arising from facilitating indirect clearing arrangements. In the event of default of the client, all information held by the client in respect of its indirect clients shall be made immediately available to the clearing member. 

 

 

  

 

 

ESMA's Questions and Answers on EMIR

Questions regarding Article 39 of EMIR

 

 

Under Article 39(6) of EMIR, what is the definition of client requirement and excess margin? Will clearing members be obliged to post this margin directly at the CCP? Additionally, how should a clearing member allocate excess margin over various CCPs it is linked to?

The terms 'client requirement' and 'excess margin' are not defined in EMIR. However, Article 39(6) of EMIR is clear that for individually segregated clients, any margin called from a client, which is over and above the amount called by the CCP to cover the positions of that client, must be posted to the CCP. The current practice of clearing members calling excess margin and retaining it is not permitted under EMIR for clients opting for individual segregation. Where a clearing member has collected additional margin in respect of particular client positions that has opted for individual client segregation, the excess margin should be passed to the CCP that clears those positions.

In the case where the relevant positions are with multiple CCPs, clearing members should ensure that the approach taken is made transparent to clients and where the clients opted for individual segregation, they will need to agree on the allocation of the excess margins to the different CCPs.

 

---

 

Does EMIR allow CCPs to offer unsegregated accounts in which the assets and positions of clearing members are not segregated from those held for the accounts of the clearing member's clients?

 

No, EMIR does not allow the use of unsegregated accounts. Article 39(2) and 39(3) of EMIR provide that CCPs must offer both 'individual client segregation' and 'omnibus client segregation' (these terms being defined in Articles 39(2) and 39(3) of EMIR). While CCPs might offer other levels of protection in addition to individual client segregation and omnibus client segregation (e.g. an omnibus gross margin client model), omnibus client segregation is the minimum level of client protection that can be used under EMIR.
This is because Article 39(4) of EMIR requires that a clearing member distinguish, in accounts with the CCP, the clearing member's own assets and positions from those assets and positions held for the accounts of the clearing member's clients. Article 39(9) of EMIR includes further criteria which must be met by the accounts held by a clearing member with a CCP. These provisions are not compatible with the use of unsegregated accounts.

 

---

 

At what time do clearing members have to comply with requirements on segregation and portability under Article 39 of EMIR?


The requirements on clearing members that are established in EMIR (e.g. those in Articles 38 and 39 of EMIR) apply to clearing members of all CCPs established in the European Union. These obligations therefore come into force at and should be met by the time that the CCP is authorised under EMIR.

 

---

 

May a CCP meet the requirements of Article 39(3) of EMIR by identifying only the value of collateral due to a client; or is it necessary to identify the specific assets due to a client?


In the case of a default of a clearing member, Article 48(6) of EMIR requires that a CCP's model of individual segregation provides for the transfer of the assets and positions held for the account of an individually segregated client to another clearing member or provides for the CCP to actively manage its risks in relation to those positions, including liquidating the assets and positions. Where the transfer of the assets and positions held for the account of an individually segregated client to another clearing member does not take place then, pursuant to Article 39(9) of EMIR, the CCP's model of individual segregation should ensure that the assets recorded in the individually segregated account are not exposed to losses connected to positions recorded in another account. Accordingly it is not sufficient that the account at the CCP identifies only the value due to the account of the client. It must identify the specific assets (e.g. the particular or equivalent securities) due to the account of the client.
Alternative approaches to segregation that identify only the value due to the accounts of the clients (while recording the assets provided for the account overall) may be offered in addition, provided they meet the relevant requirements of Article 39 of EMIR, but they do not meet the requirement to offer individual client segregation.

 

---

 

Under Article 39(3) of EMIR, the requirement for individual segregation is a requirement that the CCP offer to keep separate records and accounts enabling each clearing member to distinguish in accounts with the CCP, the assets and positions held for the account of a client from those held for the account of other clients. Does individual client segregation require:


1. That assets be segregated at the level of the security settlement system (for financial instruments) or at the level of the central bank (for cash) or at the level of the authorised financial institution (where alternative highly secured arrangements are permitted)?

 

2. That payments associated with the positions of an individually segregated client (i.e. variation margin payments, premium payments, etc.) be recorded in the separate records and accounts maintained for the individually segregated client at the CCP?

1. Individual segregation within the meaning of Article 39(3) of EMIR applies to assets and positions held at CCP level. Hence, individual segregation does not have to be necessarily reflected at the level of the security settlement system, central bank or alternative highly secured arrangements with authorised financial institutions. However, it should be noted that Article 47(5) requires that assets belonging to the CCP should be distinguished from assets belonging to clearing members when deposited with a third party.


2. Article 14(3) of Commission Delegated Regulation (EU) No 153/2013 (RTS on CCPs) requires that a CCP shall make, and keep updated, a record of the amounts of margins called by the CCP and the corresponding amount actually posted by the clearing member with respect to each individually segregated client account. Variation margin payments, representing amounts of margins called by the CCP are therefore required to be recorded in the separate records and accounts maintained for the individually segregated client at the CCP. However, this requirement does not imply that payment instructions must be made for every individually segregated account separately. CCPs may therefore issue one payment instruction for multiple accounts at the same time, so long as they issue separate margin calls for each account (house, omnibus client, individually segregated client account) and correctly record these margin calls, and the payments which correspond to them, in the records of each account.

 

---

 

Article 39.9(c) of EMIR provides that assets covering the positions recorded in an account shall not be exposed to losses connected to positions recorded in another account.

 

1. Can a CCP apply surpluses in a clearing member's house account to an omnibus client account or an individually segregated client account?


2. Can a CCP, with a clearing member's permission, use the clearing member's own assets (i.e. assets that were not posted by a client of the clearing member) to support the registration of client trades? 

 

1. The objective of the provisions in Article 39 of EMIR is to ensure that clients of clearing members are granted a high level of protection. Furthermore, Article 45 of EMIR provides that a CCP shall use the margins posted by a defaulting clearing member prior to other financial resources when covering losses.

CCPs are therefore permitted to have rules and procedures which facilitate the use of surplus margin on a defaulted clearing member's house account (that would otherwise have been payable by the CCP to the estate of the clearing member) to meet any obligation of the clearing member in respect of losses on a client account of that clearing member.
For the avoidance of doubt, surplus margin on a client account of a defaulted clearing member cannot be used to meet any losses on the defaulted clearing member's house account(s).


2. Articles 39(4) and 39(9)(a) of EMIR require that clearing members distinguish their own assets in separate accounts at the CCP from those assets held for the account of their clients.
Where a clearing member desires to use its own assets (i.e. assets that were not posted by a client of the clearing member) to fulfil the margin requirements of the client account, then such assets could be recorded in a client account at a CCP, however in doing so the assets would be treated as assets held for the account of clients of the clearing member. This would mean that upon a default of the clearing member, the assets would be exposed to losses connected to the client account in which the assets were recorded and could no longer be used to meet any losses on the defaulted clearing member's house account(s).

 

---

 

Are CCPs expected to allow each clearing member to operate more than one house or omnibus client account under Article 39 of EMIR?

 

Article 39(2) of EMIR requires CCPs to offer to keep separate records and accounts (in the plural) enabling each clearing member to distinguish in accounts (in the plural) with the CCP the assets and positions of the clearing member from those held for the account of its clients ('omnibus client segregation'). Article 39(3) of EMIR requires that upon request CCPs shall offer clearing members the possibility to open more accounts in their own name or for the account of their clients. CCPs are therefore expected to offer clearing members the possibility to open more than one omnibus client account, when requested to do so.

 

---

 

Can a participant of a trading venue which is also a clearing member of the rele-vant CCP deny its clients the protections established under Article 39 of EMIR where it exe-cutes trades on behalf of its clients and subsequently clears those trades with the relevant CCP?

 

No, even if the client does not have an explicit contractual relationship covering the clearing of these trades. Article 2(1)(15) of EMIR provides that a 'client' is "an undertaking with a contractual relation-ship with a clearing member of a CCP which enables that undertaking to clear its transactions with that CCP".

Given that the trade is cleared by a CCP, then the contractual relationship en-tered into by the client enables the clearing of the transaction with the CCP.

Therefore, even if the contractual arrangement governing the provision of trading services does not explicitly cover the provision of clearing services by the firm executing the trade on behalf of its client, the latter should be considered a client under EMIR and should benefit from the client protections established therein.

 

 

 

 

 

Advertisements


 

 

 

 

 



Last Updated on Friday, 18 August 2017 21:50
 

Search

Twitter
Copyright © 2009 - 2017 Michal Glowacki. All rights reserved.
The materials contained on this website are for general information purposes only and are subject to the disclaimer