Individual client segregation 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 as well as of house accounts of the clearing member.
CCP must offer an Individually Segregated Account model (ISA), and allow a Clearing Member to open multiple ISAs for their Clients.
For an ISA Client, excess margin called from the Client by the Clearing Member must:
1. be held at the CCP,
2. be segregated from other Clients and Clearing Members, and
3. not be exposed to losses in any other account.
(Articles 39(3) and 39(6) EMIR)
Pursuant to the ESMA's EMIR Review Report of 13 August 2015 - Review on the segregation and portability requirements (2015/1253), however, "clarification should be provided that the need for a strict segregation between client accounts and house accounts does not prevent the clearing member to use client assets in the context of a default of the client in order to allow for the clearing member to better handle the default and liquidate the positions, if necessary to contain the associated risk and avoid contagion."
EMIR does not allow the use of unsegregated accounts. Articles 39(2) and 39(3) of EMIR provide, respectively, that CCPs must offer both 'omnibus client segregation (OSA)' and 'individual client segregation' (these terms being defined in these provisions).
It should be noted, however, as explained by the ESMA Q&A updated on 11 February 2014 (ESMA/2014/164), that 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 (since they are lodged within Article 4 of EMIR and are said to be for the purpose of meeting the clearing obligation).
The main additional cost of individual client account is that the segregated client position account 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.
The aforementioned EMIR Review Report of 13 August 2015 underlines, in the case of Individually Segregated Account (ISA) "the client must be known and the direct return of asset after liquidation always possible".
The implementation of individual type of client segregation requires a tripartite agreement between the CCP, clearing member and a non-clearing member.
Another important aspect raised by ESMA Discussion Paper of 26 August 2015, Review of Article 26 of RTS No 153/2013 with respect to client accounts (ESMA/2015/1295) is ISA structure will allow a quicker identification of the clients, its exposures and its assets, thus shortening the time for portability.
Therefore ISA is characterised by a greater probability of prompt porting. Given that a CCP does not need to liquidate positions that are successfully ported, its need for collateral in default management may be reduced to the extent that ISAs do provide for more successful porting in practice.
The aforementioned EMIR Review Report of 13 August 2015 observes, moreover, "because it ring-fences a client's activity, ISA is not only a protection for the client but also for the CCP itself.
The use of ISA could thus be made compulsory in some cases for example when a client's cleared position at a given CCP exceeds a pre-determined size or for entities of the same group as the clearing member."
ESMA's Q&As contain a clearance on whether CCPs are required to provide segregated accounts for indirect clients.
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.
Insolvency
Recital 18 of 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, p. 15
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.
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.
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.
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Client segregation and portability under EMIR