Explanatory Memorandum to COM(2022)698 - Amendment of three directives regarding treatment of concentration risk towards central counterparties and counterparty risk on centrally cleared derivative transactions - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2022)698 - Amendment of three directives regarding treatment of concentration risk towards central counterparties and counterparty risk ... |
|---|---|
| source | COM(2022)698  |
| date | 07-12-2022 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
This proposal is part of the initiative aimed at ensuring that the EU has a safe, robust and competitive central clearing ecosystem, thereby promoting the Capital Markets Union (CMU) and reinforcing the EU’s open strategic autonomy. Robust and safe central counterparties (CCPs) enhance the trust of the financial system and crucially support the liquidity of key markets. A safe, robust and competitive central clearing ecosystem is a pre-condition for it to grow further. The EU central clearing ecosystem should enable EU firms to hedge their risks efficiently and safely, while at the same time safeguarding the wider financial stability. In this way, central clearing will support the EU economy. A competitive and efficient EU central clearing ecosystem will increase clearing activities, but clearing also entails risks by centralising transactions in a few CCPs being financially systemically important. Hence, those risks must be appropriately managed by CCPs and CCPs must continue to be thoroughly supervised both at the national and the wider EU level.
In addition, since 2017, concerns have been repeatedly expressed about the ongoing risks to the EU financial stability arising from the excessive concentration of clearing in some third-country CCPs, notably in a stress scenario. High-risk but low-probability events can happen, and the EU must be prepared to face them 1 . While EU CCPs have generally proven resilient throughout these developments, experience has shown that the EU central clearing ecosystem can be made stronger, to the benefit of financial stability. However, open strategic autonomy also means that the EU needs to safeguard itself against the financial stability risks which can arise when EU market participants are excessively reliant on third-country entities, as this can be a source of vulnerabilities. To overcome this situation, the initiative which this proposal is part of seeks to increase liquidity at EU CCPs, build up the EU’s central clearing capacity and reduce the risks posed to the EU financial stability by excessive exposures to third-country CCPs. Consequently, amongst others, it requires all market participants subject to a clearing obligation to hold active accounts at EU CCPs for clearing at least a certain proportion of the services that have been identified by ESMA as of substantial systemic importance for EU financial stability.
Whereas the major part of the legislative measures to enact this package are situated in the Commission proposal for a Regulation amending Regulation (EU) No 648/2012 2 (EMIR), the so-called ‘EMIR 3’ review, the current proposal holds modifications to Directive 2013/36/EU 3 (Capital Requirements Directive or ‘CRD’), Directive (EU) 2019/2034 4 (Investment Firms Directive or ‘IFD’) and Directive 2009/65/EU 5 (Undertakings for Collective Investment in Transferable Securities Directive or ‘UCITS Directive’) which are necessary to ensure that the objectives of the EMIR 3 review are achieved as well as to assure coherence. The two proposals should therefore be read in conjunction.
• Consistency with existing policy provisions in the policy area
The initiative which this proposal is part of is related to, and consistent with, other EU policies and ongoing initiatives that aim to (i) promote the Capital Markets Union CMU) 6 , (ii) reinforce the EU’s open strategic autonomy 7 and (iii) enhance the efficiency and effectiveness of EU-level supervision.
This proposal introduces limited amendments to CRD and IFD to encourage institutions and investment firms respectively, as well as their competent authorities, to systematically address any excessive concentration risk that may arise from their exposures towards CCPs, in particular those systemically important third-country CCPs (Tier 2 CCPs) that offer services determined by ESMA as being of substantial systemic importance, reflecting the broader policy objective of an open strategic autonomy in the macro-economic and financial fields by, in particular, but not only, further developing EU financial market infrastructures and increasing their resilience. Increased central clearing at EU CCPs will also contribute to more efficient post-trade arrangements which are the foundations stones of a robust CMU. The proposal also amends the UCITS Directive to eliminate counterparty risk limits for all derivative transactions that are centrally cleared by a CCP that is authorised or recognised under Regulation (EU) No 648/2012, thereby establishing a level playing-field between exchange traded and over-the-counter (OTC) derivatives and better reflecting the risk reducing nature of CCPs in derivative transactions.
• Consistency with other Union policies
This initiative should be viewed within the context of the broader Commission agenda to make the EU markets safer, more robust, more efficient and competitive as represented by the CMU and open strategic autonomy initiatives. Safe, efficient and competitive post-trade arrangements, in particular central clearing, are an essential element of robust capital markets. A fully functioning and integrated market for capital will allow the EU’s economy to grow in a sustainable way and be more competitive, in line with the strategic priority of the Commission for an Economy that Works for People, focused on creating the right conditions for job creation, growth and investment.
The initiative in question has no direct and/or identifiable impacts leading to significant harm or affecting the consistency with the climate-neutrality objectives and the obligations arising out of the European Climate Law. 8
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
CRD, IFD and the UCITS Directive set out the regulatory and supervisory framework for credit institutions, investment firms and UCITS fund respectively, which can make use of the services offered by EU and third-country CCPs. The legal basis for these Directives was Article 53(1) of the Treaty of the Functioning of the European Union (TFEU) as they aimed at coordinating the provisions concerning the taking-up and pursuit of activities of credit institutions, investment firms and UCITS. Considering that this initiative proposes further policy actions to ensure the achievement of these objectives, the related legislative proposal would be adopted under the same legal basis.
• Subsidiarity (for non-exclusive competence)
This proposal is part of the legislative package aimed at enhancing the attractiveness of EU CCPs by facilitating EU CCPs’ ability to bring new products to market and reducing compliance costs as well as strengthening EU-level supervision of EU CCPs. EU action will also address the EU’s excessive reliance on Tier 2 third-country CCPs in order to reduce the risks to EU financial stability. Safe, robust, efficient and competitive market for central clearing services contributes to deeper, more liquid markets in the EU and is essential for a well-functioning CMU.
This proposal in particular amends CRD and IFD in order to encourage institutions and investment firms respectively, as well as their competent authorities, to systematically address any excessive concentration risk that may arise from their exposures towards CCPs, in particular Tier 2 CCPs, and reflect the broader policy objective of a safer, more robust and competitive central clearing ecosystem in the EU. The proposal also amends the UCITS Directive to eliminate counterparty risk limits for all derivative transactions that are centrally cleared by a CCP that is authorised or recognised under Regulation (EU) No 648/2012, thereby establishing a level playing-field between exchange traded and OTC derivatives and better reflecting the risk reducing nature of CCPs in derivative transactions.
Member States and national supervisors cannot address on their own the systemic risks of highly integrated and interconnected CCPs that operate on a cross-border basis beyond the scope of national jurisdictions. Nor can they mitigate risks arising from diverging national supervisory practices. Member States also cannot on their own incentivise central clearing in the EU and address the inefficiencies of the framework for the cooperation of national supervisors and EU authorities. Therefore, by reason of the scale of actions, these objectives can be better achieved at EU level in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union.
• Proportionality
This proposal introduces limited changes to CRD, IFD and the UCITS Directive to encourage clearing at EU CCPs. The proposal takes full account of the principle of proportionality, being adequate to reach the objectives and not going beyond what is necessary in doing so. It is compatible with the proportionality principle, taking into account the right balance of public interest at stake and the cost-efficiency of the measures proposed. The proportionality of the preferred policy options is further assessed in Chapters 7 and 8 of the accompanying Impact Assessment.
• Choice of the instrument
CRD, IFD and the UCITS Directive are Directives and thus they need to be amended by a legal instrument of the same nature.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
The Commission services consulted extensively, engaging with a broad range of stakeholders, including EU bodies (ECB, European Systemic Risk Board (ESRB), European Supervisory Authorities (ESAs)), Member States, members of the European Parliament’s Economic and Monetary Affairs Committee, the financial services sector (banks, pension funds, investment funds, insurance companies, etc.) as well as non-financial corporates to evaluate whether EMIR sufficiently ensures EU financial stability. This process showed that there are ongoing risks to EU financial stability due to the excessive concentration of clearing in a few third-country CCPs. These risks are particularly relevant in a stress scenario.
Nonetheless, considering the relatively recent entry into force of EMIR 2.2 and the fact that some requirements do not apply yet, 9 the Commission services did not consider it appropriate to prepare a full back-to-back evaluation of the entire framework. Instead, key areas were identified upfront based on stakeholder input and internal analysis (relevant elements are explained in detail in the impact assessment, highlighting the inefficiencies and ineffectiveness of the current rules in the problem definition section (Section 3 of the accompanying Impact Assessment on the problem definition explains in detail the inefficiencies and ineffectiveness of the current rules).
• Stakeholder consultations
Contents
The Commission has consulted stakeholders throughout the process of preparing the initiative for the EMIR review, which this proposal accompanies. In particular through:
·a Commission targeted consultation between 8 February and 22 March 2022. 10 It was decided that the consultation should be targeted as the questions focused on a very specific and rather technical area. 71 stakeholders responded to the targeted consultation via the online form while some confidential responses were also submitted via email;
·a Commission Call for Evidence between 8 February and 8 March 2022 11 ;
·consultations of stakeholders through the Working Group on the opportunities and challenges of transferring derivatives from the United Kingdom to the EU, in the first half of 2021 including several stakeholder outreach meetings in February, March and June 2021;
·meeting with Members of the European Parliament on 4 May as well as bilateral meetings subsequently;
·meeting with Member States’ experts on 30 March 2022, 16 June 2022 and 8 November 2022;
·meetings of the Financial Services Committee on 2 February and 16 March 2022;
·meetings of the Economic and Financial Committee on 18 February and 29 March 2022;
·bilateral meetings with stakeholders as well as confidential information received from a wide range of stakeholders.
·Work starting in 2021 showed that improving the attractiveness of central clearing, encouraging the development of EU infrastructures, and the supervisory arrangements in the EU will take time.
·A variety of measures was identified that could help improve the attractiveness of EU CCPs and clearing activities as well as ensure that their risks are appropriately managed and supervised.
·These measures are not only in the remit of the Commission and co-legislators, but also could potentially require actions from the ECB, national central banks, ESAs, national supervisory authorities, CCPs and banks.
·The consultation showed that market participants generally prefer a market driven approach to regulatory measures, to minimise costs and for EU market participants to remain competitive internationally.
·Nevertheless, regulatory measures were supported to a certain extent, especially when allowing for a faster approval process for CCPs’ new products and services 12 .
·Measures deemed useful to enhance EU CCP’s attractiveness were: maintaining an active account with an EU CCP, measures to facilitate expanding services by EU CCPs, broadening the scope of clearing participants, amending hedge accounting rules and enhancing funding and liquidity management conditions for EU CCPs.
The initiative comprises of two legislative proposals that take this stakeholder feedback into account, as well as the feedback received through meetings with a broad range of stakeholders, EU authorities and institutions. It introduces targeted amendments to EMIR, the Capital Requirements Regulation, the Money Market Funds Regulation, CRD, IFD and the UCITS Directive aimed at:
(a)Improving the attractiveness of EU CCPs by simplifying the procedures for launching products and changing models and parameters and introducing a non-objections approval/ex-post approval/review for certain changes. This allows EU CCPs to introduce new products and model changes more quickly while ensuring adequate risk considerations are upheld and without endangering financial stability and therefore making EU CCPs more competitive;
(b)Encouraging central clearing in the EU to safeguard financial stability by requiring clearing members and clients to hold, directly or indirectly, an active account at EU CCPs, and facilitating clearing by clients will help to reduce the exposure to, and with it excessive reliance on, Tier 2 third-country CCPs which is a risk to the financial stability of the EU;
(c)Enhancing the assessment and management of cross-border risk: ensuring that authorities in the EU have adequate powers and information to monitor risks in relation to both EU and third-country CCPs, including by enhancing their supervisory cooperation within the EU.
• Collection and use of expertise
In preparing this proposal, the Commission relied on the following external expertise and data, including from ESMA, the ESRB and financial market participants, as presented in detail in the EMIR 3 review proposal which this proposal accompanies.
• Impact assessment
The Regulatory Scrutiny Board reviewed the impact assessment for the legislative package this proposal is part of. The impact assessment report, which is described in detail in the EMIR 3 review proposal, which this proposal accompanies, received a positive opinion with reservations from the Regulatory Scrutiny Board on 14 September 2022.
• Regulatory fitness and simplification
The initiative aims to enhance the attractiveness of EU CCPs, reduce the excessive reliance of EU market participants on Tier 2 CCPs, safeguard EU financial stability and enhance the EU’s open strategic autonomy. As such, and in particular the proposal for this Directive amending CRD, IFD and the UCITS Directive, does not aim at reducing costs per se.
• Fundamental rights
The EU is committed to high standards of protection of fundamental rights and is signatory to a broad set of conventions on human rights. In this context, the proposal respects these rights, in particular the economic rights, as listed in the main United Nations conventions on human rights, the Charter of Fundamental Rights of the European Union which is an integral part of the EU Treaties, and the European Convention on Human Rights.
4. BUDGETARY IMPLICATIONS
The proposal for a Directive amending CRD, IFD and the UCITS Directive will not have any impact on the budget of the EU neither does the proposal reviewing EMIR that this proposal complements, as explained in Section 8.2.5. of the impact assessment.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
The amendments are tightly interlinked with the EMIR 3 review. Arrangements should therefore be considered in conjunction with those envisaged under that proposal. The Joint Monitoring Mechanism will collect the necessary data for the monitoring of the key metrics (use of active accounts, number of active accounts, proportion of transactions cleared through active accounts, volume and excessive concentration of exposures towards different types of CCPs). This will allow for the future evaluation of the new policy tools. Regular Supervisory Review and Evaluation Process (SREP) and stress testing exercises will also help monitoring the impact of the new proposed measures on affected institutions and investment firms. In particular, this will allow the assessment of the adequacy and proportionality of such measures in the case of smaller institutions and investment firms.
• Explanatory documents (for directives)
The proposal does not require explanatory documents in relation to its transposition.
• Detailed explanation of the specific provisions of the proposal
While UCITS are allowed to invest in both OTC and exchange traded derivatives, the provisions of Article 52 of the UCITS Directive imposed regulatory limits on counterparty risk only to OTC derivative transactions, irrespective of whether the derivatives were centrally cleared. To ensure alignment with Regulation (EU) No 648/2012, to establish a level playing-field between exchange traded and OTC derivatives and to better reflect the risk reducing nature of CCPs in derivative transactions, Article 3(2) of this Directive amends Article 52 of the UCITS Directive to eliminate counterparty risk limits for all derivative transactions that are centrally cleared by a CCP that is authorised or recognised under Regulation (EU) No 648/2012. To introduce the notion of CCP in the UCITS Directive, Article 3(1) of this Directive amends Article 2(1) of the UCTIS Directive to include the definition of CCP by cross-referring to its definition in Regulation (EU) No 648/2012.
This Directive introduces new provisions and proposes amendments to several articles in Directive 2013/36/EU (the Capital Requirements Directive or CRD) and in Directive (EU) 2019/2034 (the Investment Firms Directive or IFD) in order encourage institutions and investment firms, respectively, as well as their competent authorities, to systematically address any excessive concentration risk that may arise from their exposures towards CCPs and reflect the broader policy objective of a safer, more robust, efficient and competitive market for EU central clearing services.
Article 81 of the CRD, in conjunction with Article 104 of the CRD, could already be used under the current framework to address excessive concentration of exposures towards CCPs.
However, the proposed amendments introduce more focus under the CRD on an adequate management of exposures towards CCPs, thus supporting the transition to a safer, more robust, efficient and competitive market for EU central clearing services. They also create the necessary framework in the context of the IFD. In this context, competent authorities are encouraged to review the alignment of credit institutions and investment firms with the relevant Union policy objectives or broader transition trends relating to the use of active account structure under EMIR over the short, medium and long term, thereby enabling competent authorities to address financial stability concerns that could arise from the excessive reliance on certain systemically important third-country CCPs (Tier 2 CCPs).
Article 1(1) and (2) of this Directive amend Articles 74 and 76 of the CRD to require institutions to include concentration risk arising from exposures towards CCPs, in particular those offering services of substantial systemic importance for the Union or one or more of its Member States, in institutions’ strategies and processes for evaluating internal capital needs as well as adequate internal governance. A request for the management body to develop concrete plans to address such concentration risks is also introduced in Article 76 of the CRD. Article 2(1) and (2) propose similar amendments to Articles 26 and 29 of the IFD for investment firms.
To support the supervisory review and evaluation process (SREP), Article 1(3) of this Directive amends Article 81 of the CRD to introduce a requirement for competent authorities to specifically assess and monitor institutions’ practices concerning the management of their concentration risk arising from exposures towards central counterparties as well as the progress made by institutions in adapting to the relevant policy objectives of the Union. A similar requirement is introduced in Article 36 of the IFD for investment firms via Article 2(3) of this Directive.
Article 1 i of this Directive amends Article 100 of the CRD mandating the EBA to issue guidelines on the uniform inclusion of concentration risk arising from exposures towards central counterparties in the supervisory stress testing.
Article 1(5) of this Directive amends Article 104 of the CRD to facilitate the possibility for competent authorities to address specifically the concentration risk arising from institutions’ exposures towards CCPs, by adding a concrete supervisory power to address such risk. Similar provisions are added in the context of Article 39 of the IFD for investment firms via Article 2 i of this Directive.