|Central counterparty (CCP) - Page 2|
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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.
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
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.
|Last Updated on Monday, 16 October 2017 21:18|