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European Commission gives regulators more power over clearing market

The European Commission has proposed "more robust supervision" rules for central counterparties (CCPs) in a move that has raised concerns over the future of London's euro clearing market.14 Jun 2017

CCPs have become a systemically-important part of the financial sector and their importance is growing, the Commission said

"In addition, the foreseen withdrawal of the United Kingdom from the EU will have a significant impact on the regulation and supervision of clearing in Europe," it said. 

The proposal introduces "a more pan-European approach" to the supervision of EU CCPs under the European Market Infrastructure Regulation (EMIR) and closer cooperation between supervisory authorities and central banks responsible for EU currencies, the Commission said. 

A new supervisory mechanism called the CCP Executive Session would be established within European Securities and Markets Authority (ESMA). This would be responsible for ensuring "coherent and consistent" supervision of EU CCPs as well more robust supervision of CCPs in non-EU countries, or 'third countries', it said. 

For non-EU CCPs, including eventually those in the UK, the proposal would make the process of recognising and supervising third-country CCPs more rigorous "for those which are of key systemic importance for the EU", it said. 

"The aim is to address important challenges in derivatives clearing as its scale and importance grows and to take account of the role played by third-country CCPs in the clearing of financial instruments relevant to EU financial stability," the Commission said. 

A new two tier system would mean that non-systemically important CCPs will continue to be able to operate under the existing EMIR equivalence framework. However, systemically important CCPs, called Tier 2 CCPs, would have to comply with the prudential requirements of EU CCPs while taking third-country rules into account. They would also have to comply with any additional requirements set by central banks, and agree to provide ESMA with all relevant information and allow on-site inspections. 

ESMA will decide whether a third-country CCP is systemically important by assessing the size of its business and how much it clears of each Union currency. It will also look at its links to the EU, in terms of how many of its members are EU entities and its links to EU market infrastructure, and the impact it would have if it were to fail, the Commission said

CCPs would also be defined as substantially systemically important CCPs if they are seen to be "of such systemic importance for the EU or one or more of its Member States that the additional requirements for systemically-important CCPs are insufficient to mitigate potential risks", the Commission said. 

The Commission will be able to declare that a CCP deemed to be of substantial importance can only provide services in the Union if it is authorised in the EU. "In this case, the CCP would have to establish itself in the EU and apply for authorisation to the competent authority of the Member State where it wishes to establish itself in accordance with the requirements laid out under EMIR", it said. 

Financial services expert William Maycock of Pinsent Masons, the law firm behind Out-Law.com said: "These proposals represent a tightening of the EU’s supervisory framework in relation to CCPs. Given the volume of euro-denominated derivatives contracts which are cleared in London the obvious risk is that, following Brexit, UK-based clearing houses will be classed as either 'systemically important' or as 'substantially systemically important' CCPs. They, therefore, may either have to relocate to within the EU in order to continue to carry on euro clearing business, or become subject to much more stringent supervisory measures and additional requirements from ESMA and relevant EU central banks." 

"However, the full specifications are yet to be finalised and must still pass through the EU legislative process before they come into force. The Commission also states that there will need to be additional delegated legislation clarifying the precise criteria for how clearing houses are to be designated as systemically important or non-systemically important. There is certainly a long way to go and nothing is decided, but this draft regulation clearly shows what the EU’s intentions are," Maycock said. 

EMIR was implemented in 2012 as a response to the financial crisis of 2008, and the reforms aim to further improve the financial stability of the European Union, the Commission said. 

The proposal is based on an assessment of EMIR and two public consultations: one on the operations of the European Supervisory Authorities (ESAs), another on the Capital Markets Union Mid-Term Review, the Commission said.