| Central counterparty (CCP) |
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CCPs (central counterparties) are a market infrastructure, which reduces systemic risk and enhances financial stability by standing between the two counterparties to a derivatives contract (i.e. acting as buyer to the seller and seller to the buyer of risk) and thereby reducing the risk for both.
Thereby, in a more general sense, they increasingly become the critical nodes in the financial system.
As of 9 October 2017 the following CCPs were available for the EU counterparties to satisfy requirements for mandatory clearing under the EU law:
- 17 CCPs authorised in the EU (however, not all EU CCPs were authorised to clear all asset classes), as well as
- 32 third-country CCPs (TC CCPs) that were recognised under the EMIR equivalency processes.
But, first, a few remarks on the nature and scale of the CCPs' business.
"Clearing derivatives transactions is a global financial service. As such, most clearing is done across borders, both within the EU and internationally with CCPs established in third countries. The scale and importance of CCPs in Europe and globally has nearly doubled since the post-crisis G20 commitment to clear standardised OTC derivatives through CCPs. On average 62% of their outstanding value was centrally cleared by CCPs across all types of derivative contracts. More specifically, the Bank for International Settlements estimated that the volume of cleared OTC transactions at the end of June 2016 amounted to $337 trillion globally, of which the large majority ($328 trillion) are interest rate derivatives."
Legal definition of the 'CCP' or 'central counterparty' is included in Article 2(1) of the European Market Infrastructure Regulation (EMIR).
Pursuant to this provision CCP means a legal person that interposes itself between the counterparties to the contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer.
The activity at issue is commonly known as "clearing", which is defined in the EMIR as "the process of establishing positions, including the calculation of net obligations, and ensuring that financial instruments, cash, or both, are available to secure the exposures arising from those positions".
Leave alone legal nomenclature and turn to practical business impacts. These are summarised in the concise manner in the ESMA's document "Risk Assessment on the temporary exclusion of exchange traded derivatives from Articles 35 and 36 of MiFIR of exchange traded derivatives from Articles 35 and 36 of MiFIR" (04 April 2016, ESMA/2016/461, p. 19), which unequivocally confirms:
The level playing field as regards the CCP's business is ensured in the MiFID II, which safeguards trading venues' rights to choose, which CCPs they connect to and vice versa.
MiFID II, moreover, requires trading venues and CCPs to provide access to each other on a non‑discriminatory basis.
There are reasonable grounds, then, for the market participants to be particularly interested in the CCP's legal framework, since it forms a significant part of the overall competitive edge.
Authorised CCPs' list
Among first CCPs registered by ESMA under EMIR were: - Nasdaq OMX Clearing AB, Sweden, date of authorisation - 18 March 2014, - European Central Counterparty N.V. (EuroCCP - NL), Netherlands, date of authorisation - 1 April 2014, - KDPW_CCP, Poland, date of authorisation - 8 April 2014.
Further CCPs authorised by ESMA (May 2014) were CC&G (Italy) and LCH.Clearnet SA (France) and LCH.Clearnet Ltd (UK) in June 2014.
The complete and actual list of central counterparties (CCPs) that have been authorised by ESMA to offer services and activities in the European Union in accordance with EMIR is available here.
CCPs' heterogeneity
CCPs are highly differentiated in terms of assets classes being cleared, including equities, bonds, energy, commodities, repos, clearing cash instruments and both exchange-traded and OTC derivatives.
The CCP's business is, however, not homogeneous - while a few CCPs offer clearing services in specific market segments, several EU CCPs are active in multiple asset classes.
Risk Assessment on the temporary exclusion of exchange traded derivatives from Articles 35 and 36 of MiFIR of exchange traded derivatives from Articles 35 and 36 of MiFIR, 04 April 2016, ESMA/2016/461 (p. 12) refers to six European CCPs which offer IRS clearing - although some of those CCPs have specialised on certain sets of currencies, the most liquid contracts can be cleared by up to five different CCPs.
This is the case, for example, for OTC fixed-to-float swaps on Euribor.
The situation is different in the case of commodity derivatives: although there are five CCPs clearing this asset class, they have a higher degree of specialisation and little overlap in their product offering (hence there are few identical commodity derivatives contracts which are cleared by different CCPs).
Among the broad category of the CCP's are also the ones that act in the form of banks (although only three out of the many thousands of banks in Europe are licensed as CCPs).
EBA and ESMA Report on the functioning of the Regulation (EU) No 575/2013 (CRR) with the related obligations under Regulation (EU) No 648/2012 (EMIR), ESAS-2017-82, 11 January 2017 underlines EMIR does not prevent the EU Member States from adopting an authorisation as a credit institution for CCPs established in their jurisdiction (Article 14(5)).
The said document also confirms that there are "many different models that are applied by banks and, not surprisingly, banks can indeed also be CCPs."
Also Article 23 and Recital 4 of the Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty literally refer to the CCPs being credit institutions.
Should a CCP also be licensed as a bank, the requirements of both the CRR and EMIR would, from a legal perspective, apply to the "bank-CCP".
CCPs' interconnectedness
CCPs are highly interconnected mainly due they clear common trading venues.
Some CCPs provide clearing on a cross-border basis to exchanges or other trading venues in Member States other than the Member State in which they are established.
Commission Staff Working of 13 June 2017 (SWD/2017/0246 final - 2017/0136 (COD), 13.06.2017, p. 23) provides an example of Eurex Clearing AG (established in Germany) which clears the Irish Stock Exchange, Börse Berlin is cleared by the LCH Ltd (established in the UK), LCH S.A (established in France), EuroCCP (established in the Netherlands) and SIX x-clear (established in Switzerland).
Participants on the London Stock Exchange are offered a choice of clearing services from LCH Ltd., EuroCCP and SIX x-clear for all traded instruments (except Polish and Spanish instruments, which are cleared by EuroCCP and LCH Ltd., and US instruments, which are cleared by EuroCCP).
European Commodity Clearing established in Germany clears commodity markets across the EU and elsewhere.
CCPs can be interconnected via so-called interoperability arrangements which allow clearing members of one CCP to clear transactions with clearing members of another CCP.
This is the case for EuroCCP, LCH Ltd. and SIX x-clear in various equities markets, for LCH S.A. and CC&G (established in Italy) in various bond markets and for LCH Ltd. and SIX x-clear in some markets for exchange traded derivatives.
In addition, KELER CCP (established in Hungary) is a clearing member of the European Commodity Clearing and offers access to clearing at ECC to its own clearing members.
The aforementioned Commission Staff Working of 13 June 2017 refers to the fact CCPs were originally designed to facilitate trading in securities and not as “macro- prudential institutions” with a responsibility to improve the safety and soundness of the broader financial system.
However, as the OTC derivatives market has grown and mandatory clearing of these instruments has become a feature of regulation, some CCPs have become sufficiently large and interconnected to be systemically important.
The economies of scale (due to netting and diversification benefits) attached to central clearing favour the use of a small number of large CCPs, resulting in a significant risk concentration in these infrastructures.
Equivalence regime
After these prolonged, preliminary remarks, let's go back to the issue of third-party CCPs and the aforementioned threats to their recognition in the EU.
A CCP established in an equivalent third country may provide clearing services to clearing members or trading venues established in the Union and can be used to fulfil the EMIR 'clearing obligation'.
Countries covered: Australia, Brazil, Canada, Dubai International Finance Centre (DIFC), Hong-Kong, India, Japan (commodities, financial derivatives), New Zealand, South Korea, Mexico, Singapore, South Africa, Switzerland, UAE, US (CFTC).
Commission Staff Working Document, EU equivalence decisions in financial services policy: an assessment, 27.2.2017 SWD(2017) 102 final, p. 15
It is useful to remind that for cross border issues, EMIR relies as regards CCPs on a system of equivalence decisions, combined with recognition decisions.
EMIR does not require the third country CCP to comply with the EMIR requirements for CCPs but instead relies on the CCPs to be fully compliant with their local regime and be effectively supervised domestically when the applicable CCP regime has been deemed equivalent (Final Report Draft regulatory technical standards on indirect clearing arrangements under EMIR and MiFIR, 26 May 2016, ESMA/2016/725, p. 5).
CCPs that have been recognised under the EMIR process will also obtain qualifying CCP (QCCP) status across the European Union under Regulation (EU) No 575/2013 (CRR).
Finally, CCPs that have been recognised under the EMIR process may be used by EU counterparties in order to satisfy their mandatory clearing obligations under EU law.
"Article 25 of EMIR on the recognition of third-countries CCP provides in paragraph 6 that the Commission may adopt an implementing act under Article 5 of Regulation (EU) No182/2011, determining that the legal and supervisory arrangements of a third country ensure that CCPs authorised in that third country comply with legally binding requirements which are equivalent to the requirements laid down in Title IV of EMIR, that those CCPs are subject to effective supervision and enforcement in that third country on an ongoing basis and that the legal framework of that third country provides for an effective equivalent system for the recognition of CCPs authorised under third-country legal regimes. The adoption of such an implementing act is the first of four conditions for ESMA to recognise third-country CCPs." - the European Commission has adopted a positive equivalence decision with regard to the regulatory framework applicable to CCPs in the third country. This is the primary condition for recognition. The European Commission will assess the requirements applicable to CCPs in the third country. If the requirements achieve the same regulatory outcomes in terms of reduction of systemic risk, the European Commission may determine equivalence;
- the CCP is established or authorised in a third country that is considered as having equivalent systems for anti-money-laundering and combating the financing of terrorism to those of the Union in accordance with the criteria set out in the common understanding between Member States on third-country equivalence under Directive 2005/60/EC on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing;
"The review of EMIR provides an opportunity to rethink the approach toward TC-CCPs. Considerations should be given to the following:
- Whether to keep a system of full reliance on third country rules and supervisory arrangements, or whether a system as the one applicable in the majority of the third countries should be envisaged;
- If the system of equivalence is maintained, whether such equivalence determinations should be rather adopted via Regulatory Technical Standards. This would provide for technical considerations to be fully reflected and it would ensure a more defined calendar. Whatever legislative process is decided upon, it would be important to ensure the equivalence assessment, while being outcome based, is sufficiently granular and, where necessary, is able to contain conditions to mitigate possible risks for European market participants.
[...] Should the process for the recognition be maintained as under the current EMIR, ESMA believes that it should as a minimum be complemented with a defined legal basis for not recognising a CCP. In particular, the Commission could consider revising Article 25 in order to:
- Identify the circumstances under which ESMA may decide not to recognise a TC-CCP (even though the 4 conditions are met).
- Foresee that the review of recognition under article 25(5) with respect to the extension of activities and services in the Union should be performed ex-ante and not ex-post. For instance, it could be foreseen that information on extension of activity should be provided prior to the actual extension rather than afterwards, to allow ESMA to react efficiently.
- Establish that the conditions (a) and (d) in Article 25(2) shall be met before a TC-CCP can submit an application for recognition.
- Reconsider whether for the assessment of the 4 conditions currently envisaged under EMIR, the wider consultation of many European and national authorities is valuable."
The first 'equivalence' decisions have been adopted by the European Commission on 30 October 2014 for the regulatory regimes of central counterparties (CCPs) in Australia, Hong Kong, Japan and Singapore (see the equivalence decisions).
On 29 April 2015 the European Securities and Markets Authority (ESMA) has recognised ten third-country CCPs established in Australia, Hong Kong, Japan and Singapore.
In effect, on 7 May 2015 a list of recognised, equivalent third-country CCPs as well as of the classes of financial instruments covered by the recognition of the following CCPs has been published: - ASX Clear (Futures) Pty Ltd, - ASX Clear Pty Ltd, - HKFE Clearing Corporation Limited, - Hong Kong Securities Clearing Company Limited, - OTC Clearing Hong Kong Limited, - SEHK Options Clearing House Limited, - Japan Securities Clearing Corporation, - Tokyo Financial Exchange Inc, - Singapore Exchange Derivatives Clearing Limited, - Central Depository (Pte) Limited.
The recognition by ESMA allowed the abovementioned third country CCPs to provide clearing services to clearing members or trading venues established in the EU (emission derivatives were cleared by the two Australian CCPs: ASX Clear (Futures) Pty Ltd and ASX Clear Pty Ltd. (OTC bilateral and OTC third country exchange)).
The aforementioned European Commission communication of 30 October 2014 indicated that multiple further jurisdictions (United States including) were being assessed and were given a top priority.
Nevertheless, the prolonged process of the CCP's equivalence assessments has raised some tension (see Bourses urge EU to speed up rulings on clearing houses).
The opinion has been voiced that "delayed equivalence will increasingly have the effect of cutting off third-country clearing houses from European market participants", which threatens to "lead to a re-allocation of derivatives trading activity and liquidity away from markets that have not received equivalence determinations."
The risk of fragmentation of existing pools of liquidity in derivatives, that are traded and cleared on a cross-border basis, has also been accentuated.
On 13 November 2015 the European Commission determined that five further countries (Canada, Switzerland, South Africa, Mexico and the Republic of Korea) have the equivalent regulatory regimes for central counterparties as the European Union (see the relevant European Commissions' communication).
The problem with the recognition of the US CCPs was stuck in the fact that the EU rules required CCPs to collect sufficient collateral to cover potential losses over a two-day horizon while the US only required enough collateral to cover potential losses over one day (Margin Period of Risk (MPOR)).
The shorter margin horizon under the US rules was balanced by the requirement for the US CCPs to collect sufficient collateral to cover the gross exposure of all clients, whereas the EU rules allowed for the netting of client collateral.
Effects of this temporary stalemate are covered in greater detail under following links:
- New EU rate-swap rule will deal a big blow to US,
- U.S. derivatives chief urges EC to move fast on clearinghouse rules,
- ESMA resumes US CCP recognition process following EU-US agreement.
Finally, on 15 March 2016, the European Commission adopted an equivalence decision (implementing act) for the regulatory regime for CCPs of the United States Commodity Futures Trading Commission - see:
- the European Commission's press release of 15 March 2016, IP/16/807).
The said decision grants the US the equivalent regulatory regime for central counterparties as the European Union.
It is noteworthy, market infrastructure in the US jurisdiction is based on slightly different model of a CCP serving multiple trading venues.
The design where the Options Clearing Corporation (OCC) is the sole clearing organisation for all securities options exchanges in the US has the advantage that one single clearing pot allows the 13 option exchanges to offset their open interest in that pot against all correlated positions of the other member exchanges allowing for competition at the level of the exchanges (Risk Assessment on the temporary exclusion of exchange traded derivatives from Articles 35 and 36 of MiFIR of exchange traded derivatives from Articles 35 and 36 of MiFIR, 04 April 2016, ESMA/2016/461, p. 25).
Moreover, in 2012 OCC has been designated as a Systemically Important Financial Market Utility (SIFMU) by the Financial Stability Oversight Council (FSOC) as part of the Dodd-Frank financial overhaul law.
SIFMUs are entities whose failure or disruption could threaten the stability of the United States financial system and are subject to heightened oversight by the US financial regulator, such as expanded recovery and resolution plan requirements, and broader risk management requirements.
On 16 December 2016 the European Commission has determined that India, Brazil, New Zealand, Japan Commodities, United Arab Emirates (UAE) and Dubai International Financial Centre (DIFC) have equivalent regulatory regimes for central counterparties (CCPs) to the European Union (see the European Commission's Press release of 16 December 2016).
It is noteworthy, to facilitate the pertinent processes, on 17 March 2016 ESMA issued Practical Guidance for the recognition of third-country CCPs by ESMA (ESMA/2016/365). This document reads:
"According to Article 25(2) of EMIR, ESMA may only recognise a TC-CCP where certain conditions have been satisfied. In particular the European Commission needs to have adopted an implementing act determining, amongst other things, that the legal and supervisory arrangements of the jurisdiction in which the CCP is established are equivalent to the requirements laid down in EMIR (Article 25(2)(a) of EMIR) and the jurisdiction in which the TC-CCP is established needs to have equivalent systems for anti-money laundering and combating the financing of terrorism to those established in the European Union (Article 25(2)(d) of EMIR)" (p. 3).
"CCPs established in third countries may provide clearing services to clearing members or trading venues established in the Union only where that CCP is recognised by ESMA. In addition, under the Capital Requirements Regulation (CRR), credit institutions and investment firms may only benefit from advantageous capital treatment with respect to cleared derivatives transactions, when the CCP they are facing is recognised by ESMA.
ESMA Annual Report 2015, 15 June 2016, ESMA/2016/960 (p. 56, 57)
In the said document ESMA strongly recommends that prior to submitting an application for recognition, potential applicants ascertain whether the conditions in Article 25(2) of EMIR are, or are likely to be, fulfilled.
This is important because if the conditions in Article 25(2) are not fulfilled then ESMA will not be able to grant the recognition, meaning that clearing members and trading venues established in the European Union will have to cease using the clearing services of the TC-CCP with immediate effect.
The above website comprises, among others:
1. the list of recognised third-country CCPs, as well as
2. the list of CCPs established in non-EEA countries which have applied for recognition under Article 25 of EMIR.
However, the latter list is subject to some reservations, it includes only applicants who expressly agreed to have their name mentioned publicly, moreover, is not necessarily exhaustive and it remains subject to further updates.
Hence, as the ESMA explicitly states, the said list is provided for information purposes only and it is without prejudice to any future ESMA decision of the recognition of the applicant CCPs.
Applicants are required to indicate in their submissions for recognition as a TC-CCP under EMIR, whether they express their consent to being included in the said list to be published on ESMA's website.
As of January 2017 22 third-country CCPs were recognised and more were still awaiting for recognition following new equivalence decisions by the European Commission.
However, according to the opinion of Steven Maijoor, the Chair of the European Securities and Markets Authority, the EU should consider redesigning the equivalence approach because there are doubts whether ESMA has sufficient assurance that risks of the third country infrastructures' activities in the EU are adequately assessed and addressed by the home regulator in the third country, and ESMA has very limited opportunities to assess the specific risks that third country CCPs might be creating in the EU (PRIME Finance 6th Annual Conference, Keynote speech The Hague, 23 January 2017ESMA71-844457584-329 - see box below).
Under the equivalence approach, a country is considered equivalent when its rules are similar and compatible with EU rules. When the regulatory outcomes are determined to be equivalent, subject to certain conditions, an individual market participant can be recognised and provide its services in the EU. Under the equivalence mechanism, there is a heavy reliance on the home regulator. As indicated earlier, under EMIR ESMA has already recognised more than 20 CCPs from outside the EU and we are processing 25 other applications.
Steven Maijoor, Chair of the European Securities and Markets Authority, PRIME Finance 6th Annual Conference, Keynote speech The Hague, 23 January 2017ESMA71-844457584-329
The ESMA's Letter of 27 January 2017 to the European Commission on the EMIR Review and ESMA sanctioning powers under EMIR and CRAR, ESMA70-708036281-1 argues in the same vein that considerations should also be given to the fact that in the current recognition process as defined in EMIR there is no provision that allows ESMA to deny recognition on the basis of any material risk emerging from its review of a CCP application, even though the fours conditions of Article 25(2) are met.
- introduce a risk based assessment according to which recognition may be denied;
foresee that the review of recognition under article 25(5) with respect to the extension of activities and services in the European Union should be performed ex-ante and not ex-post;
Further, let's take a look at some closer regulatory details regarding CCPs' framework.
Eligibility to become clearing member in the CCP
EMIR requires a CCP to be a designated system under Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems.
This implies that clearing members of CCPs should qualify as participants within the meaning of that Directive, i.e. practically, they must be credit institutions, investment firms, or equivalent third country credit institutions or investment firms.
Legal effects of cleared derivative transactions not accepted for clearing by a CCP
Legal effects of cleared derivative transactions not accepted for clearing by a CCP depend on whether the transaction is concluded electronically on a trading venue or concluded through other means.
Cleared derivative transactions concluded electronically on a trading venue and not accepted for clearing by a CCP are void ("the trading venue shall void such contract" - Article 5(1) and Recital (10) of the Commission Delegated Regulation (EU) 2017/582 of 29 June 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards specifying the obligation to clear derivatives traded on regulated markets and timing of acceptance for clearing).
For other cleared derivatives transactions, the rules of the trading venue, and the contractual arrangements between the counterparties, should clarify in advance how these transactions are to be treated if not accepted for clearing by a CCP (Article 5(2) and Recital (11) of the said Commission Delegated Regulation (EU) 2017/582 of 29 June 2016).
The reason for above differentiation between is that the processing and submission for clearing to a CCP of the derivative transactions concluded electronically on a trading venue requires limited time, hence, the time for the market to move, and for the value and the risk of the cleared derivative transaction to change, in between the order and the non-acceptance is also very limited.
Therefore, the damage potentially suffered by counterparties whose transactions are not accepted for clearing by the CCP in this case - as opposite to transactions concluded through other means - is negligible.
Legal requirements for CCPs
Many important aspects of the derivatives' markets become heavily impacted by CCP's-specific arrangements. These are extensively elaborated in Title IV of EMIR (Articles 26 et seq.).
An example of such problems is Article 46(1) of EMIR, which requires that bank guarantees, used as collateral for CCP clearing of power and gas derivatives, are fully backed by collateral that meets the following conditions:
- it is not subject to wrong way risk based on a correlation with the credit standing of the guarantor or the non-financial clearing member, unless that wrong way risk has been adequately mitigated by haircutting of the collateral;
- the CCP has prompt access to it and it is bankruptcy remote in case of the simultaneous default of the clearing member and the guarantor.
Expired EMIR exemption made as from 15 March 2016 CCP collateral more costly for non-financial counterparties (for details see Non-fully backed bank guarantees coming to an end as the CCP collateral).
The aforementioned impacts criticised by some sectors' representatives as well as regulatory authorities (in particular the energy industry - see CEER Response to European Commission Consultation on EMIR, 13 August 2015).
Among others, CEER disputed that a ban on using non-fully backed bank guarantees was the right remedy to alleviate the concern over CCPs' default risk.
SFTs clearing
Even if Securities Financing Transactions (SFTs) per se are not financial instruments and CCPs are authorised under EMIR to clear financial instruments, when an authorised CCP clears SFT, it must equally apply EMIR, as EMIR covers the entire activity of an authorised CCP (Report on securities financing transactions and leverage in the EU Report prepared under the mandate in Article 29(3) SFTR, 4 October 2016, ESMA/2016/1415, p. 34).
Right of use
Under Article 46 of EMIR, collateral requirements are to be met with cash and highly liquid financial instruments having minimal credit and market risk in order to avoid potential disruptive changes with regards to the eligibility or valuation of posted collateral during stress events.
In accordance with Article 39(8) of EMIR, CCPs 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 the Financial Collateral Directive provided that the use of such arrangements is provided for in its operating rules.
The clearing member is required to confirm in writing its acceptance of the CCP's operating rules and the CCP must, in turn, publicly disclose that right of use, which is to be exercised in accordance with Article 47 of EMIR.
Requirements on CCP's investment policy
Article 47 of EMIR imposes strict requirements on CCPs to invest their own funds or the contributions received.
CCPs are allowed to invest their financial resources only in cash or in highly liquid financial instruments with minimal market and credit risk.
A CCP's investments must be capable of being liquidated rapidly with minimal adverse price effect.
Furthermore, financial instruments posted as margins or as default fund contributions must, where available, be deposited with operators of securities settlement systems that ensure the full protection of those financial instruments.
Alternatively, other highly secure arrangements with authorised financial institutions may be used.
Similarly, cash deposits of a CCP must be performed through highly secure arrangements with authorised financial institutions or, alternatively, through the use of the standing deposit facilities of central banks or other comparable means provided for by central banks.
In addition, under Article 47(8) of EMIR CCPs must take into account their overall credit risk exposures to individual obligors in making their investment decisions and shall ensure that the overall risk exposure to any individual obligor remains within acceptable concentration limits.
CCP's extension of business
According to Article 15 of EMIR, a "CCP wishing to extend its business to additional services or activities not covered by the initial authorisation shall submit a request for extension to the CCP's competent authority. The offering of clearing services for which the CCP has not already been authorised shall be considered to be an extension of that authorisation. The extension of authorisation shall be made in accordance with the procedure set out under Article 17".
ESMA's Opinion of 15 November 2016, Common indicators for new products and services under Article 15 and for significant changes under Article 49 of EMIR specified the regulators' views on the details of this process.
Treatment of the CCP-cleared trades under the EMIR reporting framework
Commission Delegated Regulation of 19.10.2016 amending Commission Delegated Regulation (EU) No 148/2013 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards on the minimum details of the data to be reported to trade
Recital 2:
It is important to also acknowledge that a central counterparty (CCP) acts as a party to a derivative contract. Accordingly, where an existing contract is subsequently cleared by a CCP, it should be reported as terminated and the new contract resulting from clearing should be reported
Article 2 Cleared trades
1. Where a derivative contract whose details have already been reported pursuant to Article 9 of Regulation (EU) No 648/2012 is subsequently cleared by a CCP, that contract shall be reported as terminated by specifying in field 93 in Table 2 of the Annex the action type "Early Termination", and new contracts resulting from clearing shall be reported.
2. Where a contract is both concluded on a trading venue and cleared on the same day, only the contracts resulting from clearing shall be reported.
Article 2 of the Commission Delegated Regulation (EU) No 148/2013 of 19 December 2012 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards on the minimum details of the data to be reported to trade repositories (OJ L 52, 23.02.2013, p. 1) initially stipulated that where an existing contract is subsequently cleared by a CCP, clearing should be reported as a modification of the existing contract.
This ruled has been changed in the subsequent amendment - see the box.
EMIR reporting rules require to fill in the field "Nature of the reporting counterparty" (Field 7 in the Table 1 (Counterparty Data) of the Annex to the Commission Implementing Regulation (EU) 2017/105 of 19 October 2016 amending Implementing Regulation (EU) No 1247/2012 laying down implementing technical standards with regard to the format and frequency of trade reports to trade repositories according to Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories, where for central counterparties the format "C" is envisioned.
The said EU regulations of 19.10.2016 require, moreover, the inclusion of the data on the CCP's identity in the EMIR transaction report (Field 37 (CCP) in the Table 2 (Common data)).
In the case of a contract that has been cleared the said Field 32 should indicate the unique code (Legal Entity Identifier ((LEI)) of the CCP that has cleared the contract.
It is, moreover, important to note that the field on CCP ID should only be populated with the identifier of a CCP, i.e. a central counterparty which meets the definition of Article 2(1) of EMIR and not in the situation where a derivative contract is cleared by an entity which is not a CCP within the meaning of EMIR (e.g. a clearing house). This interpretation is acknowledged by ESMA in the Q&As on EMIR.
Eligibility to provide portfolio compression services
Portfolio compression services may be provided by CCPs irrespective of whether they are regulated under MiFID/MiFIR (see MiFIR Recital 8).
CCP clearing vs. diversification requirements
It is noteworthy, where a firm transfers funds to a CCP in order to pay a margin call the diversification requirement does not apply.
In principle, diversification requirements do not apply to client funds placed with the third party merely for the purpose of executing a transaction for the client (Recital 12 of the Commission Delegated Directive of 7.4.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits).
The same applies where an investment firm transfers client funds to a transaction account in order to make a specific transaction for the client.
CCPs' treatment under REMIT
CCPs are not considered market participants under the REMIT Regulation as they do not enter into transactions in the wholesale energy markets relevant for REMIT (see ACER's Trade Reporting User Manual (TRUM) Annex III v2.0 of 6 October 2015, p. 3).
Non-discriminatory access to CCPs (Article 35 of MiFIR) and to trading venues (Article 36 of MiFIR)
Finally, it is necessary to go back to the issues mentioned at the beginning, which regard competitiveness and access to the CCPs' services.
The purpose of strengthening competition and choice between trading venues and CCPs is reflected in the access provisions stipulated in MiFIR (Articles 35 and 36) and EMIR (Articles 7 and 8).
The distinction between the above legislative pieces is drawn along the following lines:
- derivatives traded only on multilateral trading facilities (MTFs) or other trading facilities (OTFs) as well as executed bilaterally are covered by the access provisions in EMIR;
- derivatives that are traded on regulated markets and at the same time on MTFs and/or OTFs and/or outside these trading venues do not fall under the definition of OTC derivatives in EMIR and are covered by the MIFIR access provisions.
The safeguards stipulated in Articles 35 and 36 of MiFIR and in the secondary legislation provide CCPs, trading venues, and competent authorities with the possibility to deny access on grounds of undue significant risks that cannot be managed (CCPs and trading venues) or systemic risk considerations (competent authorities).
Article 35 of MiFIR grants trading venues the right to have their trades cleared at the CCP of their choice.
This provision aims at levelling the playing field on which trading venues compete, and in particular their capability to offer comparable trading and clearing costs.
Article 35 of MiFIR focuses on strengthening competition between trading venues by giving them the choice to decide which CCP(s) they want to use for clearing trades executed on their systems.
In turn, Article 36 of MiFIR aims at ensuring choice and competition between CCPs by allowing those a right of non-discriminatory access to trading venues.
Open access to trading venues may lead to a situation where multiple CCPs clear for one trading venue.
A multiple CCP environment will allow customers to choose the CCP that serves their interest best or to consolidate their trade flow into the CCP of their choice.
Furthermore, a multiple CCP environment could contribute to reducing systemic risk due to the substitutability of CCPs and avoidance of a single point of failure.
In case of the failure of one CCP, other CCPs can continue clearing trades executed on that trading venue and the trading venue is not forced to halt trading in case of a failure of a CCP.
While there are multiple cases of CCPs clearing EU equities for various trading venues, in particular for MTFs, there is currently only one case of a CCP clearing ETDs listed on more than one trading venue: LCH.Clearnet Ltd clears index and single Norwegian stock futures and options listed on Oslo Bors and LSEDM. This agreement includes an interoperability scheme with SIX-x Clear and is operational since March 2014 (Risk Assessment on the temporary exclusion of exchange traded derivatives from Articles 35 and 36 of MiFIR of exchange traded derivatives from Articles 35 and 36 of MiFIR, 04 April 2016, ESMA/2016/461). However, pursuant to the said document, it is unclear whether this agreement would be covered by the MiFIR access provisions as this would only be the case where it concerns a voluntary interoperability requirement.
The aforementioned ESMA's document of 4 April 2016 also refers to the fact that the current absence of a recovery and resolution regime for CCPs may lead to significant implications in case of the default of an interoperable CCP.
See Commission Delegated Regulation (EU) of 24.6.2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards on clearing access in respect of trading venues and central counterparties, C(2016) 3807 final.
Non-discriminatory and transparent clearing fees charged by CCPs
Pursuant to Article 10(1) of the Commission Delegated Regulation (EU) 2017/581 of 24 June 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards on clearing access in respect of trading venues and central counterparties a CCP shall only charge fees for clearing transactions executed on a trading venue to which it has granted access on the basis of objective criteria, applicable to all clearing members and, where relevant, clients.
For this purpose, a CCP shall make all clearing members and, where relevant, clients subject to the same schedule of fees and rebates and its fees shall not depend on the trading venue where the transaction takes place.
Perspectives for the CCP's legal framework
What is ahead of the CCPs' legal infrastructures can be guessed from:
- the European Commission's 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,
- the Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority) and amending Regulation (EU) No 648/2012 as regards the procedures and authorities involved for the authorisation of CCPs and requirements for the recognition of third-country CCPs, 13.06.2017 (see boxes below).
Another important thread is the foreseen withdrawal of the United Kingdom from the EU with the effect a substantial volume of transactions denominated in euro ceasing to be cleared in the EU and no longer subject to EMIR and the EU supervisory architecture (the bulk of EU clearing is through LCH owned by the London Stock Exchange Group (Bloomberg, Equivalence becoming urgent)).
In the Proposal of 13 June 2017 for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority) and amending Regulation (EU) No 648/2012 as regards the procedures and authorities involved for the authorisation of CCPs and requirements for the recognition of third-country CCPs, the European Commission envisioned a new “two tier” system for classifying third-country CCPs.
According to the said document:
- non-systemically important CCPs would continue to be able to operate under the existing EMIR equivalence framework but Tier 2 systemically important CCPs would be subject to stricter requirements,
- as regards these limited number of Tier 2 CCPs, the European Commission, upon request by ESMA and in agreement with the relevant central bank, can decide that a CCP will only be able to provide services in the Union if it establishes itself in the EU.
Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority) and amending Regulation (EU) No 648/2012 as regards the procedures and authorities involved for the authorisation of CCPs and requirements for the recognition of third-country CCPs, 13.06.2017
Classification of non-systemically important third-country CCPs (Tier 1) and systemically important third-country CCPs (Tier 2)
...
Proportionate requirements for systemically important Tier 2 third-country CCPs
Overall, central clearing still gains in importance. According to the Commission Staff Working Document of 13 June 2017 (Impact Assessment Accompanying the document Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority) and amending Regulation (EU) No 648/2012 as regards the procedures and authorities involved for the authorisation of CCPs and the requirements for the recognition of third-country CCPs, SWD/2017/0246 final - 2017/0136 (COD)) around 62% of the global value of all OTC derivatives contracts and asset classes (interest rates, credit default, foreign exchange, etc.) is centrally cleared by CCPs, which is equivalent to $337 trillion.
About 97% ($328 trillion) of all centrally-cleared derivatives contracts are interest-rate derivatives.
At the end of 2009, about 36% of all OTC interest-rate derivatives were centrally cleared, while the corresponding figure by the end of 2015 was 60%.
When it comes to the credit derivatives (so-called CDS) market, the proportion of outstanding CDSs cleared through CCPs is increasing steadily since these data were first reported, i.e. from 10% at the end of June 2010 to 37% at end the end of June 2016.
Questions and Answers on MiFID II and MiFIR market structures topics, 7 July 2017, ESMA70-872942901-38
Question 1 [Last update: 07/07/2017]
Answer 1
11 November 2019
Final Report Technical Advice on Comparable Compliance under article 25a of EMIR, ESMA70-151-2649
3 October 2019
28 May 2019
ESMA consults on tiering, comparable compliance and fees under EMIR 2.2, 28 May 2019, ESMA71-99-1159
Consultation Paper, ESMA fees for Third-Country CCPs under EMIR 2.2, ESMA70-151-1663
5 April 2019
19 December 2018
Report, EU-wide CCP Stress Test 2017, 02 February 2018, ESMA70-151-1154
Questions and Answers (Q&A) ESMA CCP Stress Test, 02 February 2018, ESMA70-151-1179
Final Report, Guidelines on CCP conflict of interest management, 07 February 2018, ESMA70-151-1094
Commission Delegated Regulation (EU) 2017/581 of 24 June 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards on clearing access in respect of trading venues and central counterparties, OJ L 87, 31.3.2017, p. 212–223
Questions and Answers (Q&A) on ESMA's EU-wide stress tests for CCPs, 29 April 2016, ESMA/2016/665
Report EU-wide CCP Stress test 2015, 29 April 2016, 2016/658
Practical Guidance For the recognition of third-country CCPs by ESMA, 17 March 2016 (ESMA/2016/365)
Principles for Financial Market Infrastructures (PFMI)
Client segregation and portability under EMIR
Clearing obligation under EMIR
OTC interest rate derivatives' mandatory clearing
Principal-to-principal clearing model
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CCPs required to provide their members with simple tools allowing them to simulate the amount of collateral requested to clear future trades
