Central counterparty (CCP) - Page 3
European Union Electricity Market Glossary

 


 

 

 

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).

 

 

 

New

  

EMIR reform propositions on CCPs 

May 2017

 

 

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, IP/17/1150, 4 May 2017

 

   

 

 

numbering blue   CCPs required to provide their members with simple tools allowing them to simulate the amount of collateral requested to clear future trades

 

 

 

numbering blue   CCPs required to make available a thorough description of their initial margin models to their clearing members

 

 

 

numbering blue   Institutions offering clearing service must do so under fair, reasonable and non-discriminatory (FRAND) commercial terms

 

 

 

numbering blue   Assets and positions recorded in clients' accounts will not be considered to be part of the CCP's or clearing member's insolvency estate

 

 

 

 

 

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)


In view of the global increase in clearing and concentration of risk in a limited number of global CCPs, a differentiation needs to be introduced according to the type of third- country CCP recognised under EMIR.This proposal therefore requires that, when considering an application for recognition, ESMA will need to consider the degree of systemic risk presented by a third-country CCP. In order to achieve this, and to introduce a proportionate application of the requirements, a distinction needs to be made between lower risk CCPs and those that are, or will be, systemically important for the Union or one or more of its Member States. This reflects the fact that not all third-country CCPs are of equal systemic importance. This will depend on their scope and type of transactions cleared as well as the volume of their clearing activity. For example, a relatively small third-country CCP that clears only a limited number of contracts that are, for example, denominated in local currency will objectively pose fewer concerns and less risk to the Union's financial system than a third-country CCP that clears significant volumes of contracts that are denominated in a Union currency.


It is therefore proposed that ESMA has the power to distinguish between CCPs that are, or are likely to become systemically important and those that are not. Third-country CCPs that ESMA has determined as non-systemically important or not likely to become systematically important for the Union and the Member States are referred to as 'Tier 1' (Point (a) of Article 2(9) inserts point (e) in Article 25(2) of EMIR). These Tier 1 CCPs will continue to be subject to the current arrangements and conditions for third-country equivalence decisions adopted by the Commission, and which allow ESMA to recognise individual third-country CCPs. ESMA will also be tasked with new responsibilities in relation to the supervision over these recognised Tier 1 CCPs.


In contrast to Tier 1 CCPs, ESMA will also be able to determine a different category of third- country CCPs which are deemed to be systemically important or likely to become systemically important in the near future for the financial and economic stability of the Union and of the Member States (so called 'Tier 2 CCPs').This is provided for in point (c) of Article 2(9) which inserts a new paragraph (2a) in Article 25 of EMIR.


In order for ESMA to determine whether a third-country CCP is a 'Tier 2' CCP, four objective criteria are provided for (new Article 25(2a)):


(i) the nature, size and complexity of the third-country CCP's business;


(ii) the effect that the failure of, or a disruption to, the third-country CCP would have on critical markets, financial institutions, or the broader financial system and on the financial stability of the EU;


(iii) the third-country CCP's clearing membership structure, and


(iv) the third-country CCP's relationship, interdependencies, or other interactions with other financial market infrastructures.


These criteria will need to be further specified by the Commission in a delegated act (second subparagraph of Article 25(2a)) within six months of the adoption of the Regulation.


The consequence of ESMA determining a third-country CCP to be a Tier 2 CCP is that that CCP can only be recognised and permitted to provide clearing services or activities in the Union if it meets further conditions. These conditions are necessary to reflect the additional concerns that arise for the financial stability to the Union and one or more of the Member States. CCPs that have already been recognised under the current EMIR regime will continue to be recognised as 'Tier 1' CCPs until ESMA has determined whether such third-country CCPs are 'Tier 2' CCPs.

 

...

 

Proportionate requirements for systemically important Tier 2 third-country CCPs


The additional requirements that systemically important third-country CCPs must fulfil are fourfold (See point (b) of Article 2(9)):


(i) ongoing compliance with the relevant and necessary prudential requirements for EU-CCPs. These requirements concern capital requirements, requirements for the internal organisation management, conduct of business, margins, default fund, financial resources, liquidity, investments, stress tests, settlement and interoperability. They are currently set out in Article 16 and in Titles IV and V of EMIR;


(ii) written confirmation – within 180 days – from the relevant EU central banks of issue that the third-country CCP complies with any requirements imposed by those central banks. Those additional requirements would be imposed by the central banks in the exercise of their monetary policy tasks. By way of example, they could include additional requirements to address risks for liquidity, payment or settlement arrangements in the Union or Member States. In more particularity they could concern the availability and specific type of collateral held within a CCP, the level of any 'haircuts' applied to collateral, investment policy or collateral segregation, the availability of liquidity arrangements between central banks involved, the potential impact of the CCP's operations and the implications of their possible disruption or failure for the financial system and stability of the Union.


(iii) to enable ESMA to exercise its new supervisory responsibilities there must also be written consent by the third-country CCP that ESMA may access any information held by the CCP and may access any of its business premises upon request. Naturally, this needs to be able to be enforced in the third country, and a legal opinion should be available confirming that this is the case;


(iv) the third-country CCP should have all the necessary procedures and measures to be able to comply with the first and third condition above.


As the requirements above need to be applied in a proportionate manner, the proposal introduces a system according to which a third-country CCP may continue to rely on the rules and requirements in its own country. This new system of comparable compliance – which complies with FSB standards and reflects a similar system applied by the US authorities – relies on a simple procedure under which the third-country CCP can request ESMA to compare EMIR's requirements and EU supervisory standards for CCPs with those of the third country. Where comparable, ESMA may determine that the application of some or all of the requirements in place as well as the corresponding supervisory enforcement in that third country provides a comparable outcome to the application of EMIR and waive the application of corresponding EMIR provision. This approach will significantly reduce any burdens resulting from dual application of rules and requirements. The Commission will be required to adopt a delegated act to specify the details of assessment that ESMA carries out (new Article 25a).


However, in view of the growing concentration of clearing services in a limited number of global CCPs, and the increased risk which that concentration entails, some CCPs may be of specifically substantial systemic significance for the EU financial system. Therefore, when making its determination whether a third-country CCP is, or is likely to become, systemically important, ESMA may also determine, in agreement with the relevant EU central bank(s), that the risks posed by that entity to the Union's financial stability or to one or more of the Member States are of such magnitude that even a system of full application of EMIR to this third-country CCP is not enough to sufficiently mitigate such risks and that it should therefore not be recognised. Where such determination that the challenges for safeguarding financial stability in the EU that cannot be addressed through the recognition process of third-country CCPs is made, it is proposed that ESMA, in agreement with the relevant EU central banks, has the power to recommend to the Commission, that that CCP should not be recognised. On that basis, the Commission is empowered to take a decision that that CCP should not be recognised and if it wishes to provide clearing services in the Union, it should be authorised and established in one of the Member States (new paragraph (2c) of Article 25).

 

 

 

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]


When should CCPs notify the transitional arrangements foreseen in Article 35(5) of MiFIR?

 

Answer 1


Article 35(5) of MiFIR does not establish any timing other than indicating that CCPs must submit their notification before the application of MiFIR. However, given the amount of arrangements necessary for the transition to MiFID II/MiFIR and the risk of ‘bottlenecks’, ESMA encourages CCPs that meet the requirements set out in Article 35(5) of MiFIR and are considering applying for the transitional arrangements to do so as early as possible during the course of 2017. In any case, ESMA recommends that CCPs should notify their intention to make use of the temporary opt-out under Article 35(5) of MiFIR no later than 30 September 2017.


Question 2 [Last update: 07/07/2017]


Is a CCP using an open offer trade acceptance model obliged to accept a request for access from a trading venue using a novation trade acceptance model?


Answer 2


Yes, a CCP using an open offer trade acceptance model that receives a request for access from a trading venue using a novation trade acceptance model should grant that access unless it can identify how precisely the simultaneous use of an open offer and a novation trade acceptance model would give rise to significant undue risks that cannot be managed.

 

 

 

 

 

 

 

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Last Updated on Monday, 16 October 2017 20:18
 

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