Explanatory Memorandum to COM(2022)697 - Amending regulations 648/2012, 575/2013, 2017/1131 to mitigate excessive exposures to third-country central counterparties and improve the efficiency of Union clearing markets

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dossier COM(2022)697 - Amending regulations 648/2012, 575/2013, 2017/1131 to mitigate excessive exposures to third-country central counterparties ...
source COM(2022)697 EN
date 07-12-2022


1. CONTEXT OF THE PROPOSAL

• Reasons for and objectives of the proposal

Regulation (EU) No 648/2012 1 (the European Market Infrastructure Regulation or “EMIR”) regulates derivatives transactions, including measures to limit their risks through clearing in central counterparties (CCPs). 2 CCPs take on the risks faced by the parties to a trade, becoming the buyer to every seller and the seller to every buyer. By doing so, they increase market transparency and efficiency and reduce the risks in financial markets, especially for derivatives.

EMIR was adopted in the wake of the 2008/2009 financial crisis to promote financial stability and to make markets more transparent, more standardised, and thus safer. EMIR requires that derivatives transactions are reported to ensure market transparency for regulators and supervisors and that their risks are appropriately mitigated through central clearing at a CCP or by exchanging collateral, known as ‘margin’, in bilateral transactions. CCPs, and the risks they manage, have grown considerably since the adoption of EMIR.

In 2017, the Commission published two legislative proposals amending EMIR, both of which were adopted by the co-legislators in 2019. EMIR REFIT 3 recalibrated some of the requirements under EMIR to ensure their proportionality, while ensuring financial stability. Acknowledging the emerging issues related to the increasing concentration of risks in CCPs, in particular third-country CCPs, EMIR 2.2 4 revised the supervisory framework and set out a process for assessing the systemic nature of third-country CCPs by the European Securities and Markets Authority (ESMA) in cooperation with the European Systemic Risk Board (ESRB) and the central banks of issue. EMIR is complemented by the CCP Recovery and Resolution Regulation 5 , adopted in 2020, 6 to prepare for the unlikely – though massively impactful - event that an EU CCP faces severe financial distress. 7

Whilst EMIR has established a robust framework for central clearing, certain areas of the current supervisory framework have proven overly complex. This limits EU CCPs’ ability to attract business both within the EU and internationally. The supervisory approval procedures for launching new clearing services and activities by EU CCPs, as well as changes in their risk models, are in many cases unnecessarily long and burdensome. The current rules are there to ensure the safety and soundness of EU CCPs, but this could be done in many ways and the existing processes have been challenged as too slow and, at times, disproportionate in light of the envisaged change. It should not take years for approving a new product, and changes to risk models need to be swift to reflect changing market and economic circumstances. Delays in approvals increase costs and reduce the attractiveness of EU CCPs, and consequently of the EU as a place to do business. The proposal aims at mitigating these obstacles in order to foster modern and competitive CCPs in the EU that can attract business.

EMIR provides a comprehensive and robust prudential framework for CCPs and the newly adopted CCP Recovery and Resolution Regulation further strengthens the soundness of EU CCPs. This proposal aims for the EU to continue to base the evolution of its central clearing ecosystem on the strength of its rules and supervision. Robust and safe CCPs enhance the trust of the financial system and crucially support the liquidity of key markets. A safe, robust and resilient 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. This proposal aims to put firms in a better position by being able to predict the liquidity needs associated with central clearing. A competitive and efficient EU clearing ecosystem will increase central clearing activities, but central 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. Therefore, this proposal aims at ensuring a robust and joined-up supervision, building on the supervisory system the EU currently has in place.

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 8 . While EU CCPs have generally proven resilient, experience has shown that the EU 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 vulnerability. Therefore, this proposal aims at making the equivalence framework in EMIR more proportionate and to better tailor cooperation with foreign supervisors taking into account the risks posed by CCPs based in third countries – and without compromising on the need for third countries to have sound rules in place. It is also proposed that the equivalence procedure is made simpler when the risks involved in central clearing in a third country are particularly low. In addition, this proposal seeks to build up the EU’s central clearing capacity and thereby increase liquidity at EU CCPs with the aim to reduce the risks posed to the EU financial stability by excessive exposures to third-country CCPs. Therefore, this proposal requires all market participants subject to a clearing obligation, to hold active accounts at EU CCPs for clearing products that have been identified by ESMA as of substantial systemic importance for the EU financial stability.

This proposal is complemented by a proposal for a Directive introducing a limited number of changes to Directive 2013/36/EU 9 (Capital Requirements Directive or ‘CRD’), Directive (EU) 2019/2034 10 (Investment Firms Directive or ‘IFD’) and Directive 2009/65/EU 11 (Undertakings for Collective Investment in Transferable Securities Directive or ‘UCITS Directive’) as regards the treatment of concentration risk towards CCPs and the counterparty risk on centrally cleared derivative transactions. These amendments are necessary to ensure that the objectives of this EMIR 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

This proposal is related to, and consistent with, other EU policies and ongoing initiatives that aim to (i) promote the Capital Markets Union (CMU) 12 , (ii) reinforce the EU’s open strategic autonomy and (iii) enhance the efficiency and effectiveness of EU-level supervision.

First, clearing capacity is an important dimension for the CMU. The CMU is about building deep and liquid EU capital markets that can serve the needs of EU citizens, businesses and financial institutions. The Covid-19 crisis has made it more urgent to deliver on CMU as market-based financing is an essential component for the European economy’s recovery and the return to long-term growth. Safe, robust and competitive post-trade arrangements, in particular central clearing, in the EU is essential for a well-functioning CMU. The proposed legislative changes, including to further strengthen the supervisory framework, would contribute to the development of a more efficient and safer post-trading landscape in the EU.

Second, competitive, well-developed and resilient EU CCPs are a pre-condition for the EU’s open strategic autonomy. The Commission Communication on open strategic autonomy 13 sets out how the EU can reinforce its 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. Building a strong EU central clearing system with robust capacity reduces risks stemming from excessive reliance on third-country CCPs and their supervisors.

Third, recent developments in energy markets, with several energy companies facing liquidity issues when using derivatives markets, have also illustrated that EMIR needs to be enhanced so that the risks to the EU’s financial stability continue to be mitigated in light of new challenges. This means building a safe, robust and competitive EU central clearing ecosystem, able to withstand economic shocks.


• 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. It aims at ensuring that post-trade arrangements, in particular central clearing, that are an essential element of capital markets are equally safe, robust, efficient and competitive. 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 of the European Climate Law. 14

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

• Legal basis

EMIR sets out the regulatory and supervisory framework for CCPs established in the EU and third-country CCPs that provide central clearing services to clearing members or trading venues established in the EU. The legal basis for EMIR is Article 114 of the Treaty of the Functioning of the European Union (TFEU) as it establishes common rules for OTC derivatives, CCPs and trade repositories to avoid divergent national measures or practices and obstacles to the proper functioning of the internal market while ensuring financial stability. 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)

The problems identified in the impact assessment cannot be addressed by Member States acting alone and necessitate EU action. This proposal amends EMIR, in particular to enhance the attractiveness of EU CCPs by facilitating their ability to bring new products to market and reducing compliance costs and strengthening EU-level supervision of EU CCPs. EU action would therefore lead to reducing EU’s excessive reliance on third-country CCPs and thus reduce the risks to EU financial stability. A 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.

Member States and national supervisors cannot on their own solve 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 enhance the attractiveness of EU CCPs and address the inefficiencies of the framework for the cooperation of national supervisors and EU authorities. As such, the aim of EMIR to increase the safety, robustness, efficiency and competitiveness of EU CCPs in the single market and ensure financial stability cannot be sufficiently achieved by Member States, as the co-legislators acknowledged in 2012 when adopting EMIR (and in 2019 when adopting EMIR REFIT and EMIR 2.2). 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

The proposal aims to ensure that the objectives of EMIR are met in a proportionate, effective and efficient manner. Given the nature of this proposal, there is a key trade-off between the effectiveness of measures to increase clearing at EU CCPs and the cost impact on clearing participants. This trade-off is to be considered in the calibration and design of the measures themselves, so as to make costs proportionate. The proposal also reviews the supervisory arrangements for EU CCPs to address the challenges they face due to inefficient authorisation processes. In addition, changes to the supervisory architecture aim at reflecting the need for increased cooperation of authorities in the EU due to the growing importance of EU CCPs while preserving the fiscal responsibilities of the authorities of the Member State of establishment. Furthermore, the introduction of an active account requirement, the establishment of monitoring at EU level regarding the transfer of EU firms’ excessive exposures from systemically important third-country CCPs (‘Tier 2 CCPs’) to EU CCPs and the ex-post approval/non-objection procedure for certain changes to CCPs’ risk models as well as for the extension of the services they offer, take into account the concerns raised by stakeholders, including ESMA, while safeguarding the objectives of EMIR. The proposal does not go beyond what is necessary to achieve these objectives, considering the need to monitor and to mitigate any risks the operations of CCPs, including third-country CCPs, may raise for financial stability. The proportionality of the preferred policy options is further assessed in Chapters 7 and 8 of the accompanying Impact Assessment.

• Choice of the instrument

EMIR is a Regulation and thus it needs 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, 15 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 (Section 3 of the accompanying Impact Assessment on the problem definition explains in detail the the inefficiencies and ineffectiveness of the current rules).

• Stakeholder consultations

The Commission has consulted stakeholders throughout the process of preparing this proposal. In particular through:

·a Commission targeted consultation between 8 February and 22 March 2022 16 . It was decided that the consultation should be targeted and the questions were 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 17 .

·consultations of stakeholders through the Working Group on the opportunities and challenges of transferring derivatives from the United Kingdom (UK) 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.

The main messages of this consultative process were:

·Work starting in 2021 showed that improving the attractiveness of clearing, encouraging the development of EU infrastructures and strengthening the supervisory arrangements in the EU will take time.

·A variety of measures were 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 identified measures are not only within the remit of the Commission and co-legislators, but could also 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 18 .

·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 proposal takes 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 aimed at:

·Improving the attractiveness of EU CCPs by simplifying the procedures for launching products and changing models and parameters and introducing a non-objection/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.

·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 exposures to, and with it excessive reliance on, Tier 2 third-country CCPs which is a risk to the financial stability of the EU.

·Enhancing the assessment and management of cross-border risk by 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:

·ESMA’s Report under Article 25(2c) of EMIR submitted to the Commission in December 2021 19 ; the report also took into account answers to ESMA’s surveys and data collection exercises from CCPs and clearing participants;

·ESRB’s response to ESMA’s consultation under Article 25 (2c) EMIR, issued in December 2021 20 ;

·Bank for International Settlement statistics;

·CEPS, 2021, ”Setting EU CCP policy – much more than meets the eye”; and

·ClarusFT database.


This input has been complemented with, at times confidential, quantitative and qualitative input from financial markets participants.

• Impact assessment

The Commission conducted an impact assessment of relevant policy alternatives. Policy options were identified based on the following four drivers: (i) complex, lengthy and burdensome procedures, (ii) limited participation in EU CCPs and concentration in incumbent CCPs, (iii) interconnectedness of the EU financial system, (iv) inefficient framework for supervisory cooperation. The policy options were assessed against the specific objectives of improving the attractiveness of EU CCPs, encouraging clearing in EU CCPs and enhancing the assessment and management of cross-border risks.

The Impact Assessment received a positive opinion with comments by the Regulatory Scrutiny Board 21 on 14 September 2022 which made the following main recommendations for improvements:

·explain what success would look like and how it will be effectively monitored;

·make the range of options considered more comprehensive;

·bring out the rationale behind, and the envisaged design of, key measures to be dealt with through implementing regulation and clarify the criteria and parameters that will frame their development.

The requested clarifications were added in the relevant sections of the Impact Assessment.

Based on the assessment and comparison of all policy options, the Impact Assessment concluded on the following preferred policy options:

·Measures to improve the attractiveness of EU CCPs: a combination of measures simplifying the procedures for launching products and changing models as well as introducing an ex-post approval/non-objection procedure for certain changes was identified as the preferred option. These measures would simplify current procedures while preserving financial stability. Simplifying the procedures for launching products and changing models as well as introducing an ex-post/non-objection approval/review for certain changes were also assessed as separate options. However, as they would individually only partially meet the objectives, a combination of both options was deemed most appropriate to meet the outlined objectives.

·Measures to encourage central clearing in the EU to safeguard financial stability: a combination of different options was considered most appropriate to meet the objectives, which would include the following aspects: i) requiring clearing members and clients to hold an active account at EU CCPs; ii) ensuring compliance with the new requirements on clearing activities; iii) encouraging public entities that clear voluntarily through a CCP to do so in the EU via a Communication; and iv) facilitating central clearing. Combining these options would allow to address excessive reliance on Tier 2 CCPs, increase central clearing in the EU and remove obstacles to central clearing. Some of these measures may entail level 2 acts setting out the specific aspects. The policy options have also been assessed separately but a combination of the options was considered most effective to meet the objectives.

·Measures to enhance the assessment and management of cross-border risks: targeted amendments to the current supervisory framework were deemed most appropriate and proportionate as they attain the right balance between achieving the following objectives: (i) strengthen the framework for robust consideration of cross-border risks, (ii) enhance EU financial stability, and (iii) improve the attractiveness of EU CCPs, while acknowledging that resolution decisions impacting CCPs, clearing members and clients are taken at national level and Member States remain ultimately responsible for supporting financially CCPs authorised in their jurisdiction.

·The overall package of options will have a positive effect on the post-trading landscape in the EU by improving the attractiveness of EU CCPs, encouraging central clearing in the EU, enhancing the assessment and management of cross-border risk and thus contributing to the competitiveness of the EU financial markets as well as EU financial stability.

• Regulatory fitness and simplification

The initiative aims to enhance the attractiveness of EU CCPs, reduce the excessive reliance of EU market participants on non-EU CCPs, safeguard EU financial stability and enhance the EU’s open strategic autnomy. As such, it does not aim at reducing costs per se. However, the preferred policy option to increase EU CCPs’ attractiveness will lead to a simplification of procedures for EU CCPs, reducing administrative burdens and making their operations more efficient, thus also bringing about a reduction of costs. The approximate range of these cost savings has been estimated based on interactions with stakeholders and several assumptions which were needed to extrapolate the effects to the whole EU. This cost saving is of administrative nature and thus counts under the “one in, one out” approach as an “out” in the range of approx. EUR 5 million to EUR 15 million (EU total). This is likely to be concentrated in few EU CCPs (as few EU CCPs might bring new products to the market in a given year) and is likely to be beneficial in terms of their attractiveness. As regards potential additional costs relevant for “one in one out”, i.e. very limited paperwork related to opening an account with a CCP, the administrative costs are negligible (for more details, see Annex 3 of the accompanying Impact Assessment)

As regards the active account requirement, based on estimates of the Commission services on the basis on confidential information, roughly 60% of the EU clients of EU clearing members already have an account for clearing interest rate swaps at an EU CCP, and roughly 85% have one for credit default swaps. Thus, for these clients opening an account at an EU CCP for these types of products would not be an additional cost. In addition, any cost could depend on which CCP they participate in: according to confidential information provided to the Commission services, in some EU CCPs, for example, the costs of an account per se are zero under certain conditions. The active account requirement will be further specified in an RTS to be prepared by ESMA, which will be subject to a public consultation and a cost benefit analysis.

• 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, this 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 will have no implications for the budget of the Union.

This legislative initiative will have no impact on expenditures for ESMA or other bodies of the European Union.

The impact assessment identified only moderate additional costs for ESMA, while at the same time the proposed measures create efficiencies that will lead to cost reductions. In addition, some provisions clarify and recalibrate the role of ESMA whilst not constituting new tasks and are therefore to be considered budget neutral.

Costs identified relate to the setting up and operation of a new central database, i.e. an IT tool for the submission of supervisory documents. However, even though ESMA might incur higher costs related to developing or choosing such a new IT tool as well as operating it, this IT tool will also create efficiencies and ESMA will benefit from those. These efficiencies relate to considerably less manual work in the reconciliation and sharing of documents, the following up on deadlines and questions as well as coordination with national competent authorities (NCAs), the college and the CCP Supervisory Committee. These benefits are likely to outweigh the costs incurred.

Furthermore, initial additional (paper-)work related to the modification of tools and procedures, as well as to enhanced cooperation, may increase costs at first, but these are likely to be reduced, or remain stable, over time. Notably, ESMA will be required to draft regulatory / implementing technical standards (RTS/ITS) on the format and content of the documents CCPs are required to submit to supervisory authorities when submitting an application, on standards for reporting on clearing activity and exposure to non-EU CCPs and the specification of the requirement for clearing members and clients to have an active account at a Union CCP, as well as a few reports, including the annual report on the results of their monitoring activity and cross-border activities and the bi-annual report on non-financial counterparties’ clearing activities. In undertaking those activities, ESMA can build on already existing internal processes and procedures, and it may convert, where relevant, those procedures into RTSs/ITSs. In defining the active account requirement for some already identified instruments, and their ongoing monitoring, ESMA can take into account the work it has undertaken under Article 25(2c) of EMIR when assessing which Tier 2 CCPs’ clearing services are of substantial systemic importance to the Union or one or more of its Member States and might therefore only require some very limited additional resources.

Another category to be considered in the cost analysis is the modification of procedures and tools to the new supervisory cooperation framework. The cooperation in joint supervisory teams and the establishment of a joint monitoring mechanism at EU level are new elements in the supervisory framework. However, they are mainly tools to improve the cooperation between authorities and cover tasks that are already, in all essential parts, performed by the authorities, except for the monitoring of the implementation of the requirements set out for active accounts at EU CCPs, such as fees for access charged by CCPs to clients for active accounts. These new structures will likely require some reorganisation of resources and potentially create the need for additional meetings but will not have substantial budgetary implications. Moreover, the recalibrated supervisory process also comes with benefits, notably clearer responsibilities, avoiding unnecessary duplicative work and less work due to the introduction of non-objection procedures which enable ESMA and NCAs to focus on the material aspects of supervision in relation to the extension of central clearing services and changes to CCPs’ risk models.

The proposed change clarifying that ESMA can withdraw the recognition of third-country CCPs that refuse to pay fees to ESMA will be positive in terms of costs. This avoids ESMA having to invest a considerable amount of work without getting remunerated for it.

In addition, further provisions are introduced which clarify and recalibrate the role of ESMA and are therefore to be considered budget neutral. For instance, ESMA already has the obligation to issue opinions before NCAs adopt certain decisions, however the content of those opinions is recalibrated to ensure a higher degree of efficiency in the supervisory process and ESMA is given a formal opportunity to issue an opinion on CCPs’ annual review and evaluation as well as on the withdrawal of their authorisation and margin requirements. In addition, ESMA is to take a clear role in coordinating and providing recommendations in emergency situations. These are tasks that, in all material respects, relate to their already existing ongoing work and the provisions clarify and therefore strengthen ESMA’s position, providing clear responsibilities.

Even though smaller changes to the role of other European Union bodies, such as the European Commission or the European Central Bank, are introduced, they will not have budgetary implications.

5. OTHER ELEMENTS

• Implementation plans and monitoring, evaluation and reporting arrangements

The measures aim at improving the attractiveness of EU CCPs and enhancing the supervision of cross-border risks in the EU. As such, several changes to EMIR are considered and, in some cases, amendments to other pieces of EU legislation. The proposal ensures that the relevant EU bodies can access the relevant information, while not giving rise to undue costs. The proposal includes a provision that an evaluation of EMIR in its entirety should be carried out, with a focus on its effectiveness and efficiency in meeting its original aims (i.e. improving the efficiency and safety of EU clearing markets and preserving financial stability). The evaluation should consider all aspects of EMIR, but especially improved attractiveness of EU CCPs. In principle, this evaluation should take place at least 5 years after the Regulation enters into and would seek to collect input from all relevant stakeholders.

• Detailed explanation of the specific provisions of the proposal

Contents

1.

Detailed explanation of the specific provisions of the proposal


2.

1. Intragroup transactions


EMIR provides for a framework exempting intragroup transactions (domestically and cross-border) from the clearing obligation under Article 4 and the margin requirements under Article 11 of that Regulation. In order to provide more legal certainty and predictability concerning the framework for intragroup decisions, the need for an equivalence decision is replaced by a list of jurisdictions for which an exemption cannot be granted. Article 3 should therefore be amended to replace the need for an equivalence decision with a list of third countries for which an exemption should not be granted and Article 13 should be deleted. These third countries should be those that are listed as a high-risk third country that has strategic deficiencies in its regime on anti-money laundering and counter terrorist financing, in accordance with Article 9 of Directive (EU) 2015/849 of the European Parliament and of the Council, and those listed in Annex I of the Union list of non-cooperative jurisdictions for tax purposes. The Commission is also empowered to adopt delegated acts to identify the third countries whose entities may not benefit from those exemptions despite not being identified in those lists, as being an entity from a third country identified in those lists is not necessarily the only factor that can influence risk, including counterparty risk or legal risk, associated with derivative contracts.

3.

2. Clearing obligation


Article 4 is amended to introduce an exemption from the clearing obligation where an EU financial counterparty or a non-financial counterparty, subject to the clearing obligation under EMIR, enters into a transaction with a pension scheme arrangement established in a third country which is exempted from the clearing obligation under its national law.

4.

3. Clearing obligation for financial counterparties


Article 4a is amended and as a result, when calculating the position towards the thresholds under Articles 4a of EMIR, only those derivative contracts that are not cleared at a CCP authorised under Article 14 or recognised under Article 25 of that Regulation should be included in that calculation.

5.

4. Active account


A new Article 7a is introduced in order to address the risks associated with excessive exposures of EU clearing members and clients to third-country CCPs that provide clearing services identified as of substantial systemic importance by ESMA, and thereby ensure the integrity and stability of the EU financial system. This article requires financial counterparties and non-financial counterparties that are subject to the clearing obligation, to hold active accounts, directly or indirectly, at CCPs established in the EU, to clear at least a certain proportion of the services identified as of substantial systemic importance at EU CCPs, and to report on that. This requirement should lead to a reduction of excessive exposures in substantially systemic clearing services offered by the relevant Tier 2 CCPs, to the extent necessary to safeguard financial stability. ESMA, in cooperation with EBA, EIOPA and the ESRB and after consulting the ESCB, shall establish the details of the calibration of the activity to be maintained in these active accounts and the reporting requirements of transactions cleared at such active accounts. The Commission is empowered, where ESMA undertakes an assessment pursuant to Article 25(2c), to adopt a delegated act to amend the list of categories of derivative contracts which are subject to the active account requirement by adding or removing categories from that list.

6.

5. Information on clearing services


A new Article 7b is introduced to require clearing members and clients that provide clearing services, to inform their clients about the possibility to clear a relevant contract at an EU CCP.

Article 7b also introduces an obligation for EU clearing members and EU clients to report to their competent authority the scope of clearing undertaken at non-EU CCPs. To ensure that the information to be submitted is specified and provided in a harmonised manner, ESMA is required to develop draft regulatory and implementing technical standards specifying the required information.

7.

6. Reporting obligation


Article 9 is amended to remove the exemption from reporting requirements for transactions between counterparties within a group, where at least one of the counterparties is a non-financial counterparty, in order to ensure visibility on intra-group transactions.

8.

7. Clearing obligation for non-financial counterparties


Article 10 is amended to require ESMA to review and clarify, where appropriate, the regulatory technical standards relating to the criteria for establishing which OTC derivative contracts are objectively measurable as reducing risks, the so-called hedging exemption, and the designation of thresholds in order to properly and accurately reflect the risks and characteristics in derivatives, and to consider whether the classes of OTC derivatives, namely interest rate, foreign exchange, credit and equity derivatives, are still the relevant classes. ESMA is encouraged to consider and provide, amongst others, more granularity for commodity derivatives.

Article 10 is also amended to require, when calculating the positions towards the thresholds, that only those derivative contracts that are not cleared at a CCP authorised under Article 14 or recognised under Article 25 should be included in that calculation.

9.

8. Risk-mitigation techniques for OTC derivative contracts not cleared by a CCP


Article 11 is amended to provide non-financial counterparties that become subject for the first time to the obligation to exchange collateral for OTC derivative contracts not cleared by a CCP, with an implementation period of 4 months in order to negotiate and test the arrangements to exchange collateral.

EBA may issue guidelines or recommendations to ensure a uniform application of the risk-management procedures in cooperation with the other ESAs.

10.

9. Authorisation of a CCP and extension of activities and services


Articles 14 and 15 are amended to clarify that authorised CCPs should also be able to be authorised to provide clearing services and activities in non-financial instruments, in addition to their authorisation to provide clearing services and activities in financial instruments.

11.

10. Authorisation of a CCP, extension of activities and services and procedure for granting and refusing authorisation


Articles 14, 15 and 17 are amended in order to ensure the relevant procedures for CCPs to expand their product offer are shorter, less complex and more certain in their outcome for EU CCPs. The competent authorities are required to swiftly acknowledge receipt of the application assessing whether the documents required for the authorisation or extension have been provided by the CCP. To ensure that EU CCPs submit all required documents with their applications, ESMA is required to develop draft regulatory and implementing technical standards specifying such documents, their format and content. In addition, the CCP should submit all documents to a central database where they should be shared instantaneously with the CCP’s competent authority, ESMA and the college. Furthermore, the CCP’s competent authority, ESMA and the college, during a predefined assessment period, should interact with each other and ask the CCP questions to ensure a flexible and cooperative process.

12.

11. Non-objection and ex-post procedures for granting a request fo extension of activities or services


A new Article 17a is introduced to provide CCPs with the possibility to undergo a non-objection procedure, instead of a regular procedure, for the authorisation of additional services or activities a CCP intends to offer which do not increase the risks for the CCP. Article 17a states which additional services and activities are considered non-material and are therefore to be approved through such a non-objection procedure by that CCP’s competent authority and for which the CCP may start to offer before the decision is received by the CCP’s competent authority. Apart from these cases, a CCP may also ask its competent authority for the non-objection procedure to apply where it considers that the proposed additional service or activity would not increase its risks.

13.

12. Procedure for seeking the opinion from ESMA and the college


A new Article 17b is introduced in order to clarify the scope and process to be followed where a competent authority seeks the opinion of ESMA and the college before adopting a supervisory decision for which the CCP does not submit an application, e.g. regarding a CCP’s compliance with requirements on record-keeping or conflicts of interests.

14.

13. College and opinion of the college


Articles 18 and 19 are amended to further foster a cooperative supervision of CCPs on an ongoing basis. The college is therefore requested to also issue an opinion where a competent authority considers withdrawing a CCP’s authorisation as well as when a competent authority conducts the annual review and evaluation of that CCP. ESMA should manage and chair the college for each EU CCP and be granted the right to vote.

15.

14. Withdrawal of authorisation


Article 20 is amended to require the competent authority to consult ESMA and the members of the college before the CCP’s competent authority takes a decision to withdraw, or restrict the scope of, a particular service or activity , except where a decision is required urgently.

16.

15. Annual review


Article 21 is amended to indicate that the annual review should consider the services or activities the CCP provides or the model changes the CCP uses based on a non-objection procedure. Also, the frequency of the report resulting from the review is further specified ( the report should be delivered, at least, on a yearly basis on a given date). Moreover, it is specified that the report is subject to the opinion by ESMA and the college.

17.

16. Supervisory cooperation between competent authorities and ESMA with regards to authorised CCPs and procedure for granting and refusing authorisation


Articles 17 and 23a are amended in order to enable ESMA to issue an opinion to the CCP’s competent authority also in relation to a CCP’s annual review and evaluation, margin requirements and the withdrawal of its authorisation. When issuing such an opinion, ESMA is to assess the CCP’s compliance with the relevant EMIR requirements, focusing in particular on identified cross-border risks or risks to EU financial stability.

Moreover, ESMA should publish the fact that a competent authority does not comply or does not intend to comply with its opinion or the opinion of the college or with any conditions or recommendations included therein. ESMA can also publish the reasons for non-compliance provided by the competent authority.

Article 23a is amended to further specify the role of ESMA in strengthening the coordination in emergency situations and assessing risks, in particular on a cross-border basis.

18.

17. Joint Supervisory Teams, non-objection procedures for granting a request of extension of activities or services and review and evaluation


A new Article 23b is introduced in order to increase the cooperation of the authorities involved in the supervision of authorised EU CCPs by establishing joint supervisory teams. The tasks of joint supervisory teams include: (i) to provide input to the CCP’s competent authority within the context of the non-objection procedure for extending a CCP’s existing authorisation, (ii) to assist in establishing the frequency and depth of a CCP’s review and evaluation and (iii) to participate to on-site inspections.

19.

18. Joint Monitoring Mechanism


A new Article 23c is introduced in order to establish a cross-sectoral monitoring mechanism bringing together Union bodies involved in the supervision of EU CCPs, clearing members and clients. ESMA, in cooperation with the other bodies participating to the Joint Monitoring Mechanism, is to submit an annual report to the European Parliament, the Council and the Commission on the results of the monitoring activity in order to inform future policy decisions. ESMA may also issue guidelines or recommendations if it considers that competent authorities fail to ensure clearing members’ and clients’ compliance with the active account requirement or it identifies a risk to the EU financial stability.

20.

19. Emergency situation


Article 24 is amended to further enhance the role of ESMA in an emergency situation by enabling ESMA to convene meetings of the CCP Supervisory Committee, either on its own initiative or upon request, potentially with an enlarged composition, to coordinate effectively competent authorities’ responses. ESMA is also empowered to ask, by simple request, information from market participants in order to perform its coordination function in these cases. ESMA may also issue recommendations directed to the CCP’s competent authorities.

21.

20. CCP Supervisory Committee


Article 24a is amended in order for ESMA to map and identify the supervisory priorities, to consider cross-border risks including interconnections, interlinkages and concentration risks. In addition, Article 24a is amended to allow central banks of issue to attend all meetings of the CCP Supervisory Committee for EU CCPs and for the relevant authorities for clients and EU bodies to be invited, where appropriate.

22.

21. Recognition of a third-country CCP


Article 25 is amended to clarify that where ESMA undertakes a review of a third-country CCP’s recognition, that CCP should not be obliged to submit a new application but should provide ESMA with all information necessary for such review.

Article 25 is amended to introduce the possibility for the Commission, where in the interests of the Union, to take a proportionate approach and waive the requirement for a third country to have an effective equivalent system for the recognition of third-country CCPs when adopting an equivalence decision for that third-country.

To ensure that cooperation arrangements are proportionate, ESMA should tailor them to different jurisdictions based on the CCP(s) established in the respective jurisdiction. For Tier 2 CCPs the cooperation arrangements should cover a broader range of information to be exchanged between ESMA and the relevant third-country authorities and with an increased frequency.

Article 25 is further amended in order for cooperation arrangements to include the right for ESMA to also be informed where a Tier 2 CCP is required to enhance its preparedness in financial distress, by, for example, establishing a recovery plan or where an authority in such a third country establishes resolution plans. ESMA is also to be informed of the aspects relevant for the financial stability of the EU in relation to emerging crisis.

23.

22. Ongoing compliance with the conditions for recognition


Article 25b is amended to clarify that Tier 2 CCPs are to provide ESMA with information on a regular basis.

24.

23. Withdrawing of recognition and public notice


Article 25p and 25r are amended to clarify that ESMA can withdraw the recognition where a non-EU CCP infringes any of the requirements under EMIR and can issue a public notice where fees are not paid or where a CCP has not taken a remedial action requested by ESMA.

25.

24. Information to competent authorities


Article 31 on the notification on changes to the management of a CCP is amended to clarify the procedure in relation to the sharing of information and issuing ESMA and college opinions.

26.

25. ESMA and college opinions


Articles 32, 35, 41 and 54 are amended to clarify the requests for ESMA and college opinions.

27.

26. Participation requirements and general provisions regarding organisational requirements


Articles 26 and 37 are amended to clarify that CCPs should not be allowed to be clearing members of other CCPs nor accept to have other CCPs or clearinghouses as clearing members or indirect clearing members.

28.

27. Participation requirements


Article 37 is amended to set out that where a CCP has on-boarded or intends to on-board non-financial counterparties as clearing members, that CCP should ensure that certain additional requirements on margin requirements and default funds are met. Non-financial counterparties should not be permitted to offer client clearing services and only be allowed to keep accounts at the CCP for assets and positions held for their own account. The competent authority for the CCP should report to ESMA and the college on a regular basis on the appropriateness of accepting non-financial counterparties as clearing members. ESMA is mandated to prepare a draft RTS on the elements to be considered when determining the access criteria and might issue an opinion on the appropriateness of such arrangements following an ad-hoc peer review.

29.

28. Transparency


Article 38 is amended in order to ensure that clients and indirect clients have better visibility and predictability of margin calls. Clearing members and clients providing clearing services should ensure transparency towards their clients.

30.

29. Margin requirements


Article 41 is amended to ensure that CCPs continuously revise the level of their margins while taking into account any potentially procyclical effects of such revisions, reflecting current market conditions and considering the potential impact of their intraday margin collections and payments on the liquidity position of their participants.

31.

30. Liquidity risk controls


Article 44 is amended to better reflect the entities whose default could materially affect a CCP’s liquidity position by requiring a CCP to take into account the liquidity risk generated by the default of at least two entities, including clearing members and liquidity service providers

32.

31. Collateral requirements


Article 46 is amended to allow bank guarantees and public guarantees to be considered eligible as highly liquid collateral provided that they are unconditionally available upon request within the liquidation period and making sure a CCP takes them into account when calculating its overall exposure to the bank. Furthermore, a CCP should take into account any potential procyclical effects when revising the level of the haircuts it applies to the assets it accepts as collateral.

33.

32. Review of models, stress testing and back testing


Article 49 is amended in order to ensure the relevant procedures for CCPs to apply model changes are shorter, less complex and more certain in their outcome. The competent authorities are required to swiftly acknowledge receipt of the application for the model change by assessing whether the documents required have been provided by the CCP. To ensure that EU CCPs submit all required documents with their applications, ESMA is required to develop draft regulatory and implementing technical standards specifying such documents, their format and content. In addition, the CCP should submit all documents to a central database where they should be shared instantaneously with the CCP’s competent authority, ESMA and the college. Article 49 also introduces the possibility to undergo a non-objection procedure, instead of a regular procedure, for the validation of model changes considered not significant and specifies which changes are considered significant. Where a CCP considers the change as non-significant it may start to use the model change before the decision is received by the CCP’s competent authority.

34.

33. Amendments to the Reports and Review


Article 85 is amended to require the Commission to submit by [5 years after the entry into force of this Regulation] a report assessing the application of this Regulation. The Commission is required to submit that report to the European Parliament and to the Council, together with any appropriate proposals. In addition, the current requirement to deliver a report by 2 January 2023 is removed. ESMA is also required to submit a report by [3 years after the entry into force of this Regulation] on its staffing and resources.

35.

34. Amendments to the Capital Requirements Regulation (CRR)


Article 382 i of the CRR 22 is amended in order to align relevant provisions in the CRR with the changes suggested in this proposal. The amendment adjusts the scope of the own funds requirement for credit valuation adjustment risk, notably by clarifying which intragroup transactions can be excluded from that requirement.

36.

35. Amendments to the Money Market Funds Regulation (MMFR)


Article 17 of the MMFR 23 is amended regarding the provisions on investment policy regarding counterparty risk limits. It excludes centrally cleared derivative transactions from the counterparty risk limits set out in Article 17 i and 17(6)(c) of the MMFR. Furthermore, a definition of a CCP is added in Article 2, specifically as a new point (24).