Central counterparty (CCP)
CCPs (central counterparties) are a market infrastructure, which reduces systemic risk and enhances financial stability by standing between the two counterparties to a derivatives contract (i.e. acting as buyer to the seller and seller to the buyer of risk) and thereby reducing the risk for both.
15 January 2023
3 January 2022
Proposal for a Regulation of the European Parliament and the Council amending Regulations (EU) No 648/2012, (EU) No 575/2013 and (EU) 2017/1131 as regards measures to mitigate excessive exposures to third-country central counterparties and improve the efficiency of Union clearing markets
Thereby, in a more general sense, they increasingly become the critical nodes in the financial system. As of 9 October 2017 the following CCPs were available for the EU counterparties to satisfy requirements for mandatory clearing under the EU law:
- 17 CCPs authorised in the EU (however, not all EU CCPs were authorised to clear all asset classes), as well as
But, first, a few remarks on the nature and scale of the CCPs' business.
Communication from the European Commission "Responding to challenges for critical financial market infrastructures and further developing the Capital Markets Union" of 4 May 2017 (COM(2017) 225 final) said:
"Clearing derivatives transactions is a global financial service. As such, most clearing is done across borders, both within the EU and internationally with CCPs established in third countries. The scale and importance of CCPs in Europe and globally has nearly doubled since the post-crisis G20 commitment to clear standardised OTC derivatives through CCPs. On average 62% of their outstanding value was centrally cleared by CCPs across all types of derivative contracts. More specifically, the Bank for International Settlements estimated that the volume of cleared OTC transactions at the end of June 2016 amounted to $337 trillion globally, of which the large majority ($328 trillion) are interest rate derivatives."
Legal definition of the 'CCP' or 'central counterparty' is included in Article 2(1) of the European Market Infrastructure Regulation (EMIR). Pursuant to this provision CCP means a legal person that interposes itself between the counterparties to the contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer. The activity at issue is commonly known as "clearing", which is defined in the EMIR as "the process of establishing positions, including the calculation of net obligations, and ensuring that financial instruments, cash, or both, are available to secure the exposures arising from those positions".
Leave alone legal nomenclature and turn to practical business impacts. These are summarised in the concise manner in the ESMA's document "Risk Assessment on the temporary exclusion of exchange traded derivatives from Articles 35 and 36 of MiFIR of exchange traded derivatives from Articles 35 and 36 of MiFIR" (04 April 2016, ESMA/2016/461, p. 19), which unequivocally confirms:
"Trading and clearing costs are inextricably interlinked since the customer's choice of a trading venue is, among others, based on total costs, i.e. trading and clearing costs. If a trading venue can offer only competitive trading costs, but – due to the lack of access to a CCP providing competitive clearing costs and delivering margin netting benefits – no attractive clearing conditions, it may lose some of its business or exit the market."
The level playing field as regards the CCP's business is ensured in the MiFID II, which safeguards trading venues' rights to choose, which CCPs they connect to and vice versa. MiFID II, moreover, requires trading venues and CCPs to provide access to each other on a non‑discriminatory basis. There are reasonable grounds, then, for the market participants to be particularly interested in the CCP's legal framework, since it forms a significant part of the overall competitive edge.
Authorised CCPs' list
Among first CCPs registered by ESMA under EMIR were:
- Nasdaq OMX Clearing AB, Sweden, date of authorisation - 18 March 2014,
- European Central Counterparty N.V. (EuroCCP - NL), Netherlands, date of authorisation - 1 April 2014,
- KDPW_CCP, Poland, date of authorisation - 8 April 2014.
Further CCPs authorised by ESMA (May 2014) were CC&G (Italy) and LCH.Clearnet SA (France) and LCH.Clearnet Ltd (UK) in June 2014. The complete and actual list of central counterparties (CCPs) that have been authorised by ESMA to offer services and activities in the European Union in accordance with EMIR is available here.
CCPs are highly differentiated in terms of assets classes being cleared, including equities, bonds, energy, commodities, repos, clearing cash instruments and both exchange-traded and OTC derivatives. The CCP's business is, however, not homogeneous - while a few CCPs offer clearing services in specific market segments, several EU CCPs are active in multiple asset classes.
Risk Assessment on the temporary exclusion of exchange traded derivatives from Articles 35 and 36 of MiFIR of exchange traded derivatives from Articles 35 and 36 of MiFIR, 04 April 2016, ESMA/2016/461 (p. 12) refers to six European CCPs which offer IRS clearing - although some of those CCPs have specialised on certain sets of currencies, the most liquid contracts can be cleared by up to five different CCPs. This is the case, for example, for OTC fixed-to-float swaps on Euribor.
The situation is different in the case of commodity derivatives: although there are five CCPs clearing this asset class, they have a higher degree of specialisation and little overlap in their product offering (hence there are few identical commodity derivatives contracts which are cleared by different CCPs). Among the broad category of the CCP's are also the ones that act in the form of banks (although only three out of the many thousands of banks in Europe are licensed as CCPs).
CRR definition of the credit institution ("an undertaking the business of which is to take deposits or other repayable funds from the public and to grant credits for its own account") allows a whole range of activities that banks can exercise.
EBA and ESMA Report on the functioning of the Regulation (EU) No 575/2013 (CRR) with the related obligations under Regulation (EU) No 648/2012 (EMIR), ESAS-2017-82, 11 January 2017 underlines EMIR does not prevent the EU Member States from adopting an authorisation as a credit institution for CCPs established in their jurisdiction (Article 14(5)). The said document also confirms that there are "many different models that are applied by banks and, not surprisingly, banks can indeed also be CCPs."
Also Article 23 and Recital 4 of the Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty literally refer to the CCPs being credit institutions.
Should a CCP also be licensed as a bank, the requirements of both the CRR and EMIR would, from a legal perspective, apply to the "bank-CCP".
CCPs are highly interconnected mainly due they clear common trading venues. Some CCPs provide clearing on a cross-border basis to exchanges or other trading venues in Member States other than the Member State in which they are established.
Commission Staff Working of 13 June 2017 (SWD/2017/0246 final - 2017/0136 (COD), 13.06.2017, p. 23) provides an example of Eurex Clearing AG (established in Germany) which clears the Irish Stock Exchange, Börse Berlin is cleared by the LCH Ltd (established in the UK), LCH S.A (established in France), EuroCCP (established in the Netherlands) and SIX x-clear (established in Switzerland). Participants on the London Stock Exchange are offered a choice of clearing services from LCH Ltd., EuroCCP and SIX x-clear for all traded instruments (except Polish and Spanish instruments, which are cleared by EuroCCP and LCH Ltd., and US instruments, which are cleared by EuroCCP). European Commodity Clearing established in Germany clears commodity markets across the EU and elsewhere.
CCPs can be interconnected via so-called interoperability arrangements which allow clearing members of one CCP to clear transactions with clearing members of another CCP. This is the case for EuroCCP, LCH Ltd. and SIX x-clear in various equities markets, for LCH S.A. and CC&G (established in Italy) in various bond markets and for LCH Ltd. and SIX x-clear in some markets for exchange traded derivatives. In addition, KELER CCP (established in Hungary) is a clearing member of the European Commodity Clearing and offers access to clearing at ECC to its own clearing members. The aforementioned Commission Staff Working of 13 June 2017 refers to the fact CCPs were originally designed to facilitate trading in securities and not as “macro- prudential institutions” with a responsibility to improve the safety and soundness of the broader financial system. However, as the OTC derivatives market has grown and mandatory clearing of these instruments has become a feature of regulation, some CCPs have become sufficiently large and interconnected to be systemically important. The economies of scale (due to netting and diversification benefits) attached to central clearing favour the use of a small number of large CCPs, resulting in a significant risk concentration in these infrastructures.
After these prolonged, preliminary remarks, let's go back to the issue of third-party CCPs and the aforementioned threats to their recognition in the EU.
A CCP established in an equivalent third country may provide clearing services to clearing members or trading venues established in the Union and can be used to fulfil the EMIR 'clearing obligation'. Countries covered: Australia, Brazil, Canada, Dubai International Finance Centre (DIFC), Hong-Kong, India, Japan (commodities, financial derivatives), New Zealand, South Korea, Mexico, Singapore, South Africa, Switzerland, UAE, US (CFTC).
Commission Staff Working Document, EU equivalence decisions in financial services policy: an assessment, 27.2.2017 SWD(2017) 102 final, p. 15
It is useful to remind that for cross border issues, EMIR relies as regards CCPs on a system of equivalence decisions, combined with recognition decisions. The European Commission in its communication of 30 October 2014 has recalled that a central counterparty established outside of the European Union (third-country CCP - TC-CCP) may provide clearing services to EU clearing members and trading venues where it has been recognised in accordance with the conditions set out in Article 25 of EMIR. EMIR does not require the third country CCP to comply with the EMIR requirements for CCPs but instead relies on the CCPs to be fully compliant with their local regime and be effectively supervised domestically when the applicable CCP regime has been deemed equivalent (Final Report Draft regulatory technical standards on indirect clearing arrangements under EMIR and MiFIR, 26 May 2016, ESMA/2016/725, p. 5). CCPs that have been recognised under the EMIR process will also obtain qualifying CCP (QCCP) status across the European Union under Regulation (EU) No 575/2013 (CRR). Finally, CCPs that have been recognised under the EMIR process may be used by EU counterparties in order to satisfy their mandatory clearing obligations under EU law.
"Article 25 of EMIR on the recognition of third-countries CCP provides in paragraph 6 that the Commission may adopt an implementing act under Article 5 of Regulation (EU) No182/2011, determining that the legal and supervisory arrangements of a third country ensure that CCPs authorised in that third country comply with legally binding requirements which are equivalent to the requirements laid down in Title IV of EMIR, that those CCPs are subject to effective supervision and enforcement in that third country on an ongoing basis and that the legal framework of that third country provides for an effective equivalent system for the recognition of CCPs authorised under third-country legal regimes. The adoption of such an implementing act is the first of four conditions for ESMA to recognise third-country CCPs."
A non-EU CCP wishing to obtain recognition must apply to the European Securities and Markets Authority (ESMA) and the conditions for recognition that must be checked are:
- the European Commission has adopted a positive equivalence decision with regard to the regulatory framework applicable to CCPs in the third country. This is the primary condition for recognition. The European Commission will assess the requirements applicable to CCPs in the third country. If the requirements achieve the same regulatory outcomes in terms of reduction of systemic risk, the European Commission may determine equivalence;
- the central counterparty in question is authorised and supervised in accordance with the regulatory framework determined to be equivalent under the above condition. ESMA will check this is the case when the CCP applies for recognition;
- the CCP is established or authorised in a third country that is considered as having equivalent systems for anti-money-laundering and combating the financing of terrorism to those of the Union in accordance with the criteria set out in the common understanding between Member States on third-country equivalence under Directive 2005/60/EC on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing;
- cooperation arrangements have been established between the European Securities and Markets Authority - ESMA) and the relevant third country supervisory authorities covering supervisory arrangements and the sharing/notification of information.
ESMA initiates this part of the process with the relevant regulators of the CCP that has applied for recognition.
"The review of EMIR provides an opportunity to rethink the approach toward TC-CCPs. Considerations should be given to the following:
- Whether to keep a system of full reliance on third country rules and supervisory arrangements, or whether a system as the one applicable in the majority of the third countries should be envisaged;
- If the system of equivalence is maintained, whether such equivalence determinations should be rather adopted via Regulatory Technical Standards. This would provide for technical considerations to be fully reflected and it would ensure a more defined calendar. Whatever legislative process is decided upon, it would be important to ensure the equivalence assessment, while being outcome based, is sufficiently granular and, where necessary, is able to contain conditions to mitigate possible risks for European market participants.
[...] Should the process for the recognition be maintained as under the current EMIR, ESMA believes that it should as a minimum be complemented with a defined legal basis for not recognising a CCP. In particular, the Commission could consider revising Article 25 in order to:
- Identify the circumstances under which ESMA may decide not to recognise a TC-CCP (even though the 4 conditions are met).
- Foresee that the review of recognition under article 25(5) with respect to the extension of activities and services in the Union should be performed ex-ante and not ex-post. For instance, it could be foreseen that information on extension of activity should be provided prior to the actual extension rather than afterwards, to allow ESMA to react efficiently.
- Establish that the conditions (a) and (d) in Article 25(2) shall be met before a TC-CCP can submit an application for recognition.
- Reconsider whether for the assessment of the 4 conditions currently envisaged under EMIR, the wider consultation of many European and national authorities is valuable."
The first 'equivalence' decisions have been adopted by the European Commission on 30 October 2014 for the regulatory regimes of central counterparties (CCPs) in Australia, Hong Kong, Japan and Singapore (see the equivalence decisions). The CCPs in these third country jurisdictions are able to obtain recognition in the EU, and can therefore be used by market participants to clear standardised OTC derivatives as required by EU legislation, whilst remaining subject solely to the regulation and supervision of their home jurisdiction. Although rules may differ in the detail, an outcome based approach is used. In principle, the European Commission begins its assessment for equivalence if a CCP from a third country seeks recognition from the ESMA. If a determination of equivalence is made, it will be given effect through a legally binding implementing act in accordance with Article 25(6) EMIR.
On 29 April 2015 the European Securities and Markets Authority (ESMA) has recognised ten third-country CCPs established in Australia, Hong Kong, Japan and Singapore. In effect, on 7 May 2015 a list of recognised, equivalent third-country CCPs as well as of the classes of financial instruments covered by the recognition of the following CCPs has been published:
- ASX Clear (Futures) Pty Ltd,
- ASX Clear Pty Ltd,
- HKFE Clearing Corporation Limited,
- Hong Kong Securities Clearing Company Limited,
- OTC Clearing Hong Kong Limited,
- SEHK Options Clearing House Limited,
- Japan Securities Clearing Corporation,
- Tokyo Financial Exchange Inc,
- Singapore Exchange Derivatives Clearing Limited,
- Central Depository (Pte) Limited.
The recognition by ESMA allowed the abovementioned third country CCPs to provide clearing services to clearing members or trading venues established in the EU (emission derivatives were cleared by the two Australian CCPs: ASX Clear (Futures) Pty Ltd and ASX Clear Pty Ltd. (OTC bilateral and OTC third country exchange)). The aforementioned European Commission communication of 30 October 2014 indicated that multiple further jurisdictions (United States including) were being assessed and were given a top priority. Nevertheless, the prolonged process of the CCP's equivalence assessments has raised some tension (see Bourses urge EU to speed up rulings on clearing houses). The opinion has been voiced that "delayed equivalence will increasingly have the effect of cutting off third-country clearing houses from European market participants", which threatens to "lead to a re-allocation of derivatives trading activity and liquidity away from markets that have not received equivalence determinations." The risk of fragmentation of existing pools of liquidity in derivatives, that are traded and cleared on a cross-border basis, has also been accentuated.
On 13 November 2015 the European Commission determined that five further countries (Canada, Switzerland, South Africa, Mexico and the Republic of Korea) have the equivalent regulatory regimes for central counterparties as the European Union (see the relevant European Commissions' communication).
The problem with the recognition of the US CCPs was stuck in the fact that the EU rules required CCPs to collect sufficient collateral to cover potential losses over a two-day horizon while the US only required enough collateral to cover potential losses over one day (Margin Period of Risk (MPOR)). The shorter margin horizon under the US rules was balanced by the requirement for the US CCPs to collect sufficient collateral to cover the gross exposure of all clients, whereas the EU rules allowed for the netting of client collateral.
Effects of this temporary stalemate are covered in greater detail under following links:
Finally, on 15 March 2016, the European Commission adopted an equivalence decision (implementing act) for the regulatory regime for CCPs of the United States Commodity Futures Trading Commission - see:
- Commission Implementing Decision (EU) 2016/377 of 15 March 2016 on the equivalence of the regulatory framework of the United States of America for central counterparties that are authorised and supervised by the Commodity Futures Trading Commission to the requirements of Regulation (EU) No 648/2012 of the European Parliament and of the Council, and
The said decision grants the US the equivalent regulatory regime for central counterparties as the European Union. It is noteworthy, market infrastructure in the US jurisdiction is based on slightly different model of a CCP serving multiple trading venues.
The design where the Options Clearing Corporation (OCC) is the sole clearing organisation for all securities options exchanges in the US has the advantage that one single clearing pot allows the 13 option exchanges to offset their open interest in that pot against all correlated positions of the other member exchanges allowing for competition at the level of the exchanges (Risk Assessment on the temporary exclusion of exchange traded derivatives from Articles 35 and 36 of MiFIR of exchange traded derivatives from Articles 35 and 36 of MiFIR, 04 April 2016, ESMA/2016/461, p. 25). Moreover, in 2012 OCC has been designated as a Systemically Important Financial Market Utility (SIFMU) by the Financial Stability Oversight Council (FSOC) as part of the Dodd-Frank financial overhaul law. SIFMUs are entities whose failure or disruption could threaten the stability of the United States financial system and are subject to heightened oversight by the US financial regulator, such as expanded recovery and resolution plan requirements, and broader risk management requirements.
Complementary to the above Commission Implementing Decision (EU) 2016/377 of 15 March 2016 is the Commission Implementing Decision (EU) 2021/85 of 27 January 2021 on the equivalence to the requirements of Regulation (EU) No 648/2012 of the European Parliament and of the Council of the regulatory framework of the United States of America for central counterparties that are authorised and supervised by the U.S. Securities and Exchange Commission.
On 16 December 2016 the European Commission has determined that India, Brazil, New Zealand, Japan Commodities, United Arab Emirates (UAE) and Dubai International Financial Centre (DIFC) have equivalent regulatory regimes for central counterparties (CCPs) to the European Union (see the European Commission's Press release of 16 December 2016).
It is noteworthy, to facilitate the pertinent processes, on 17 March 2016 ESMA issued Practical Guidance for the recognition of third-country CCPs by ESMA (ESMA/2016/365). This document reads:
"According to Article 25(2) of EMIR, ESMA may only recognise a TC-CCP where certain conditions have been satisfied. In particular the European Commission needs to have adopted an implementing act determining, amongst other things, that the legal and supervisory arrangements of the jurisdiction in which the CCP is established are equivalent to the requirements laid down in EMIR (Article 25(2)(a) of EMIR) and the jurisdiction in which the TC-CCP is established needs to have equivalent systems for anti-money laundering and combating the financing of terrorism to those established in the European Union (Article 25(2)(d) of EMIR)" (p. 3).
"CCPs established in third countries may provide clearing services to clearing members or trading venues established in the Union only where that CCP is recognised by ESMA. In addition, under the Capital Requirements Regulation (CRR), credit institutions and investment firms may only benefit from advantageous capital treatment with respect to cleared derivatives transactions, when the CCP they are facing is recognised by ESMA.
This has led 42 third-country CCPs to apply for recognition to ESMA, as of 31 December 2015.
One of the conditions to be granted recognition is the adoption by the Commission of a so-called "equivalence decision" determining, inter alia, that the legal and supervisory arrangements of the third- country in which the CCP is established are equivalent to the EMIR requirements."
In the said document ESMA strongly recommends that prior to submitting an application for recognition, potential applicants ascertain whether the conditions in Article 25(2) of EMIR are, or are likely to be, fulfilled. This is important because if the conditions in Article 25(2) are not fulfilled then ESMA will not be able to grant the recognition, meaning that clearing members and trading venues established in the European Union will have to cease using the clearing services of the TC-CCP with immediate effect.
The ESMA's website covering comprehensive overview of the third country (non-EU) equivalence issues under EMIR can be accessed here. The above website comprises, among others:
1. the list of recognised third-country CCPs, as well as
2. the list of CCPs established in non-EEA countries which have applied for recognition under Article 25 of EMIR.
However, the latter list is subject to some reservations, it includes only applicants who expressly agreed to have their name mentioned publicly, moreover, is not necessarily exhaustive and it remains subject to further updates. Hence, as the ESMA explicitly states, the said list is provided for information purposes only and it is without prejudice to any future ESMA decision of the recognition of the applicant CCPs. Applicants are required to indicate in their submissions for recognition as a TC-CCP under EMIR, whether they express their consent to being included in the said list to be published on ESMA's website.
As of January 2017 22 third-country CCPs were recognised and more were still awaiting for recognition following new equivalence decisions by the European Commission. However, according to the opinion of Steven Maijoor, the Chair of the European Securities and Markets Authority, the EU should consider redesigning the equivalence approach because there are doubts whether ESMA has sufficient assurance that risks of the third country infrastructures' activities in the EU are adequately assessed and addressed by the home regulator in the third country, and ESMA has very limited opportunities to assess the specific risks that third country CCPs might be creating in the EU (PRIME Finance 6th Annual Conference, Keynote speech The Hague, 23 January 2017ESMA71-844457584-329 - see box below).
Under the equivalence approach, a country is considered equivalent when its rules are similar and compatible with EU rules. When the regulatory outcomes are determined to be equivalent, subject to certain conditions, an individual market participant can be recognised and provide its services in the EU. Under the equivalence mechanism, there is a heavy reliance on the home regulator. As indicated earlier, under EMIR ESMA has already recognised more than 20 CCPs from outside the EU and we are processing 25 other applications.
ESMA raised two main concerns regarding the equivalence mechanism in its earlier mentioned reports on the EMIR review in 2015. First, the main benefits of the equivalence system are envisaged to materialise when all main jurisdictions apply this approach: an internationally active CCP would then in principle mainly be supervised by its home regulator. This is beneficial from the perspective of avoiding overlaps and duplications in supervision and regulation.
However, it is also true that the EU is "an island" of equivalence and third-country reliance in a world that has mostly opted for registering individually those infrastructures and market participants which want to do cross-border business. Hence, third country CCPs have benefited from the EU's equivalence system, while EU CCPs are still required to be authorised and to be subject to the supervision of the third country regulator when they want to be active outside the EU. Obviously, this was not the intended result when designing the equivalence mechanism.
The second concern expressed in our review reports of 2015 relates to the strong reliance on the home country regulator: do we have sufficient assurance that risks of the third country infrastructures' activities in the EU are adequately assessed and addressed by the home regulator in the third country? ESMA has very limited opportunities to see the specific risks that third country CCPs might be creating in the EU as we have very limited powers regarding information collection and risk assessment. This second concern is especially relevant the more important the role of the third country in the EU's financial system.
To conclude, I think the EU should consider redesigning the equivalence approach taking the two concerns identified above into account.
Steven Maijoor, Chair of the European Securities and Markets Authority, PRIME Finance 6th Annual Conference, Keynote speech The Hague, 23 January 2017ESMA71-844457584-329
The ESMA's Letter of 27 January 2017 to the European Commission on the EMIR Review and ESMA sanctioning powers under EMIR and CRAR, ESMA70-708036281-1 argues in the same vein that considerations should also be given to the fact that in the current recognition process as defined in EMIR there is no provision that allows ESMA to deny recognition on the basis of any material risk emerging from its review of a CCP application, even though the fours conditions of Article 25(2) are met.
In the ESMA's view, in the case the current system is maintained, at a minimum, some key improvements recognition procedure should be envisaged:
- introduce a risk based assessment according to which recognition may be denied;
- foresee that the review of recognition under article 25(5) with respect to the extension of activities and services in the European Union should be performed ex-ante and not ex-post;
- establish that the conditions (a) and (d) in Article 25(2) shall be met before a TC-CCP can submit an application; reconsider whether for the assessment of the 4 conditions currently envisaged under EMIR, the wider consultation of many European and national authorities is valuable; and
- introduce recognition fees to cover for ESMA related costs and avoid that EU taxpayers finance the recognition costs of foreign infrastructures willing to offer services in the EU.
Another major milestone as regards the CCP equivalency regime happened on 14 July 2020 when the European Commission adopted:
- Commission Delegated Regulation (EU) 2020/1304 of 14 July 2020 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to the minimum elements to be assessed by ESMA when assessing third-country CCPs’ requests for comparable compliance and the modalities and conditions of that assessment,
- Commission Delegated Regulation (EU) 2020/1303 of 14 July 2020 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to the criteria that ESMA should take into account to determine whether a central counterparty established in a third country is systemically important or likely to become systemically important for the financial stability of the Union or of one or more of its Member States,
- Commission Delegated Regulation (EU) 2020/1302 of 14 July 2020 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to fees charged by the European Securities and Markets Authority to central counterparties established in third countries.
The above delegated acts on tiering, comparable compliance and fees under EMIR set out the new regulatory and supervisory regime for third-country CCPs, including the details for conducting the tiering assessment of TC-CCPs to determine the systemic importance for the EU of a TC-CCP which has applied for recognition under EMIR.
They have been published in the EU Official Journal on 21 September 2020.
ESMA needs to conduct these determinations before a TC-CCP can be recognised in accordance with the applicable requirements. Moreover, on 21 September 2020 the European Commission adopted Implementing Decision (EU) 2020/1308 determining, for a limited period of time, that the regulatory framework applicable to central counterparties in the United Kingdom of Great Britain and Northern Ireland is equivalent, in accordance with Regulation (EU) No 648/2012 of the European Parliament and of the Council.
Further, on 28 September 2020 ESMA has recognised three CCPs established in the United Kingdom – ICE Clear Europe Limited, LCH Limited, and LME Clear Limited – as third country CCPs (TC-CCPs) eligible to provide their services in the EU, after the end of the transition period following the withdrawal of the UK from the EU on 31 December 2020.
ESMA in this regard has adopted the following tiering decisions:
- LME Clear Limited has been assessed as a Tier 1 CCP;
- ICE Clear Limited as a Tier 2 CCP; and
- LCH Limited as a Tier 2 CCP.
In line with the equivalence decision, the recognition decisions will only take effect on the day following the end of the transition period and continue to apply while the equivalence decision remains in force, which is for 18 months until 30 June 2022.
On 8 February 2022 the European Commission adopted a decision to extend equivalence for UK central counterparties (CCPs) until 30 June 2025 (on 9 February 2022 Commission Implementing Decision (EU) 2022/174 of 8 February 2022 determining, for a limited period of time, that the regulatory framework applicable to central counterparties in the United Kingdom of Great Britain and Northern Ireland is equivalent, in accordance with Regulation (EU) No 648/2012 of the European Parliament and of the Council was published in the EU Official Journal).
Other important equivalency decisions were adopted on 22 June 2022:
- Commission Implementing Decision (EU) 2022/985 of 22 June 2022 on the equivalence of the regulatory framework for central counterparties in Israel to the requirements of Regulation (EU) No 648/2012 of the European Parliament and of the Council;
- Commission Implementing Decision (EU) 2022/984 of 22 June 2022 on the equivalence of the regulatory framework of the People’s Republic of China for central counterparties that are authorised to clear OTC derivatives in the interbank market and supervised by the People’s Bank of China to the requirements of Regulation (EU) No 648/2012 of the European Parliament and of the Council.
Eligibility to become clearing member in the CCP
EMIR requires a CCP to be a designated system under Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems. This implies that clearing members of CCPs should qualify as participants within the meaning of that Directive, i.e. practically, they must be credit institutions, investment firms, or equivalent third country credit institutions or investment firms.
Legal effects of cleared derivative transactions not accepted for clearing by a CCP
Legal effects of cleared derivative transactions not accepted for clearing by a CCP depend on whether the transaction is concluded electronically on a trading venue or concluded through other means. Cleared derivative transactions concluded electronically on a trading venue and not accepted for clearing by a CCP are void ("the trading venue shall void such contract" - Article 5(1) and Recital (10) of the Commission Delegated Regulation (EU) 2017/582 of 29 June 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards specifying the obligation to clear derivatives traded on regulated markets and timing of acceptance for clearing). For other cleared derivatives transactions, the rules of the trading venue, and the contractual arrangements between the counterparties, should clarify in advance how these transactions are to be treated if not accepted for clearing by a CCP (Article 5(2) and Recital (11) of the said Commission Delegated Regulation (EU) 2017/582 of 29 June 2016). The reason for above differentiation between is that the processing and submission for clearing to a CCP of the derivative transactions concluded electronically on a trading venue requires limited time, hence, the time for the market to move, and for the value and the risk of the cleared derivative transaction to change, in between the order and the non-acceptance is also very limited.
Therefore, the damage potentially suffered by counterparties whose transactions are not accepted for clearing by the CCP in this case - as opposite to transactions concluded through other means - is negligible.
Legal requirements for CCPs
Many important aspects of the derivatives' markets become heavily impacted by CCP's-specific arrangements. These are extensively elaborated in Title IV of EMIR (Articles 26 et seq.). An example of such problems is Article 46(1) of EMIR, which requires that bank guarantees, used as collateral for CCP clearing of power and gas derivatives, are fully backed by collateral that meets the following conditions:
- it is not subject to wrong way risk based on a correlation with the credit standing of the guarantor or the non-financial clearing member, unless that wrong way risk has been adequately mitigated by haircutting of the collateral;
- the CCP has prompt access to it and it is bankruptcy remote in case of the simultaneous default of the clearing member and the guarantor.
Expired EMIR exemption made as from 15 March 2016 CCP collateral more costly for non-financial counterparties (for details see Non-fully backed bank guarantees coming to an end as the CCP collateral). The aforementioned impacts criticised by some sectors' representatives as well as regulatory authorities (in particular the energy industry - see CEER Response to European Commission Consultation on EMIR, 13 August 2015). Among others, CEER disputed that a ban on using non-fully backed bank guarantees was the right remedy to alleviate the concern over CCPs' default risk.
Even if Securities Financing Transactions (SFTs) per se are not financial instruments and CCPs are authorised under EMIR to clear financial instruments, when an authorised CCP clears SFT, it must equally apply EMIR, as EMIR covers the entire activity of an authorised CCP (Report on securities financing transactions and leverage in the EU Report prepared under the mandate in Article 29(3) SFTR, 4 October 2016, ESMA/2016/1415, p. 34).
Right of use
Under Article 46 of EMIR, collateral requirements are to be met with cash and highly liquid financial instruments having minimal credit and market risk in order to avoid potential disruptive changes with regards to the eligibility or valuation of posted collateral during stress events. In accordance with Article 39(8) of EMIR, CCPs have a right of use relating to the margins or default fund contributions collected via a security financial collateral arrangement, within the meaning of Article 2(1)(c) of the Financial Collateral Directive provided that the use of such arrangements is provided for in its operating rules. The clearing member is required to confirm in writing its acceptance of the CCP's operating rules and the CCP must, in turn, publicly disclose that right of use, which is to be exercised in accordance with Article 47 of EMIR.
Requirements on CCP's investment policy
Article 47 of EMIR imposes strict requirements on CCPs to invest their own funds or the contributions received. CCPs are allowed to invest their financial resources only in cash or in highly liquid financial instruments with minimal market and credit risk. A CCP's investments must be capable of being liquidated rapidly with minimal adverse price effect.
Furthermore, financial instruments posted as margins or as default fund contributions must, where available, be deposited with operators of securities settlement systems that ensure the full protection of those financial instruments. Alternatively, other highly secure arrangements with authorised financial institutions may be used. Similarly, cash deposits of a CCP must be performed through highly secure arrangements with authorised financial institutions or, alternatively, through the use of the standing deposit facilities of central banks or other comparable means provided for by central banks.
In addition, under Article 47(8) of EMIR CCPs must take into account their overall credit risk exposures to individual obligors in making their investment decisions and shall ensure that the overall risk exposure to any individual obligor remains within acceptable concentration limits.
CCP's extension of business
According to Article 15 of EMIR, a "CCP wishing to extend its business to additional services or activities not covered by the initial authorisation shall submit a request for extension to the CCP's competent authority. The offering of clearing services for which the CCP has not already been authorised shall be considered to be an extension of that authorisation. The extension of authorisation shall be made in accordance with the procedure set out under Article 17".
ESMA's Opinion of 15 November 2016, Common indicators for new products and services under Article 15 and for significant changes under Article 49 of EMIR specified the regulators' views on the details of this process.
Treatment of the CCP-cleared trades under the EMIR reporting framework
Commission Delegated Regulation of 19.10.2016 amending Commission Delegated Regulation (EU) No 148/2013 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards on the minimum details of the data to be reported to trade
It is important to also acknowledge that a central counterparty (CCP) acts as a party to a derivative contract. Accordingly, where an existing contract is subsequently cleared by a CCP, it should be reported as terminated and the new contract resulting from clearing should be reported
1. Where a derivative contract whose details have already been reported pursuant to Article 9 of Regulation (EU) No 648/2012 is subsequently cleared by a CCP, that contract shall be reported as terminated by specifying in field 93 in Table 2 of the Annex the action type "Early Termination", and new contracts resulting from clearing shall be reported.
2. Where a contract is both concluded on a trading venue and cleared on the same day, only the contracts resulting from clearing shall be reported.
Article 2 of the Commission Delegated Regulation (EU) No 148/2013 of 19 December 2012 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards on the minimum details of the data to be reported to trade repositories (OJ L 52, 23.02.2013, p. 1) initially stipulated that where an existing contract is subsequently cleared by a CCP, clearing should be reported as a modification of the existing contract. This ruled has been changed in the subsequent amendment - see the box.
EMIR reporting rules require to fill in the field "Nature of the reporting counterparty" (Field 7 in the Table 1 (Counterparty Data) of the Annex to the Commission Implementing Regulation (EU) 2017/105 of 19 October 2016 amending Implementing Regulation (EU) No 1247/2012 laying down implementing technical standards with regard to the format and frequency of trade reports to trade repositories according to Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories, where for central counterparties the format "C" is envisioned. The said EU regulations of 19.10.2016 require, moreover, the inclusion of the data on the CCP's identity in the EMIR transaction report (Field 37 (CCP) in the Table 2 (Common data)).
In the case of a contract that has been cleared the said Field 32 should indicate the unique code (Legal Entity Identifier ((LEI)) of the CCP that has cleared the contract. It is, moreover, important to note that the field on CCP ID should only be populated with the identifier of a CCP, i.e. a central counterparty which meets the definition of Article 2(1) of EMIR and not in the situation where a derivative contract is cleared by an entity which is not a CCP within the meaning of EMIR (e.g. a clearing house). This interpretation is acknowledged by ESMA in the Q&As on EMIR.
Eligibility to provide portfolio compression services
Portfolio compression services may be provided by CCPs irrespective of whether they are regulated under MiFID/MiFIR (see MiFIR Recital 8).
CCP clearing vs. diversification requirements
It is noteworthy, where a firm transfers funds to a CCP in order to pay a margin call the diversification requirement does not apply. In principle, diversification requirements do not apply to client funds placed with the third party merely for the purpose of executing a transaction for the client (Recital 12 of the Commission Delegated Directive of 7.4.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits).
The same applies where an investment firm transfers client funds to a transaction account in order to make a specific transaction for the client.
CCPs' treatment under REMIT
CCPs are not considered market participants under the REMIT Regulation as they do not enter into transactions in the wholesale energy markets relevant for REMIT (see ACER's Trade Reporting User Manual (TRUM) Annex III v2.0 of 6 October 2015, p. 3).
Non-discriminatory access to CCPs (Article 35 of MiFIR) and to trading venues (Article 36 of MiFIR)
Finally, it is necessary to go back to the issues mentioned at the beginning, which regard competitiveness and access to the CCPs' services. The purpose of strengthening competition and choice between trading venues and CCPs is reflected in the access provisions stipulated in MiFIR (Articles 35 and 36) and EMIR (Articles 7 and 8).
The distinction between the above legislative pieces is drawn along the following lines:
- derivatives traded only on multilateral trading facilities (MTFs) or other trading facilities (OTFs) as well as executed bilaterally are covered by the access provisions in EMIR;
- derivatives that are traded on regulated markets and at the same time on MTFs and/or OTFs and/or outside these trading venues do not fall under the definition of OTC derivatives in EMIR and are covered by the MIFIR access provisions.
The safeguards stipulated in Articles 35 and 36 of MiFIR and in the secondary legislation provide CCPs, trading venues, and competent authorities with the possibility to deny access on grounds of undue significant risks that cannot be managed (CCPs and trading venues) or systemic risk considerations (competent authorities). Article 35 of MiFIR grants trading venues the right to have their trades cleared at the CCP of their choice. This provision aims at levelling the playing field on which trading venues compete, and in particular their capability to offer comparable trading and clearing costs.
Article 35 of MiFIR focuses on strengthening competition between trading venues by giving them the choice to decide which CCP(s) they want to use for clearing trades executed on their systems. In turn, Article 36 of MiFIR aims at ensuring choice and competition between CCPs by allowing those a right of non-discriminatory access to trading venues. Open access to trading venues may lead to a situation where multiple CCPs clear for one trading venue.
A multiple CCP environment will allow customers to choose the CCP that serves their interest best or to consolidate their trade flow into the CCP of their choice. Furthermore, a multiple CCP environment could contribute to reducing systemic risk due to the substitutability of CCPs and avoidance of a single point of failure. In case of the failure of one CCP, other CCPs can continue clearing trades executed on that trading venue and the trading venue is not forced to halt trading in case of a failure of a CCP.
While there are multiple cases of CCPs clearing EU equities for various trading venues, in particular for MTFs, there is currently only one case of a CCP clearing ETDs listed on more than one trading venue: LCH.Clearnet Ltd clears index and single Norwegian stock futures and options listed on Oslo Bors and LSEDM. This agreement includes an interoperability scheme with SIX-x Clear and is operational since March 2014 (Risk Assessment on the temporary exclusion of exchange traded derivatives from Articles 35 and 36 of MiFIR of exchange traded derivatives from Articles 35 and 36 of MiFIR, 04 April 2016, ESMA/2016/461). However, pursuant to the said document, it is unclear whether this agreement would be covered by the MiFIR access provisions as this would only be the case where it concerns a voluntary interoperability requirement.
The aforementioned ESMA's document of 4 April 2016 also refers to the fact that the current absence of a recovery and resolution regime for CCPs may lead to significant implications in case of the default of an interoperable CCP (see Commission Delegated Regulation (EU) of 24.6.2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards on clearing access in respect of trading venues and central counterparties, C(2016) 3807 final)
Moreover, it should be noted that according to the European Commission Proposal of 25 November 2021 for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 600/2014 as regards enhancing market data transparency, removing obstacles to the emergence of a consolidated tape, optimising the trading obligations and prohibiting receiving payments for forwarding client orders (COM(2021) 727 final) „exchanges would no longer be obliged to accept that non-affiliated clearing-houses ensure their post-trade operations”.
Articles 1(21), (22) and (23) of the said Proposal remove the “open access” obligation for exchange-traded derivatives. Clearing infrastructures in the European Union would no longer be obliged to clear derivatives trades that are not executed on their vertically integrated trading platform. Likewise, trading venues in the Union no longer need to accept that non-affiliated clearing infrastructure clear trades executed on their platform.
Non-discriminatory and transparent clearing fees charged by CCPs
Pursuant to Article 10(1) of the Commission Delegated Regulation (EU) 2017/581 of 24 June 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards on clearing access in respect of trading venues and central counterparties a CCP shall only charge fees for clearing transactions executed on a trading venue to which it has granted access on the basis of objective criteria, applicable to all clearing members and, where relevant, clients. For this purpose, a CCP shall make all clearing members and, where relevant, clients subject to the same schedule of fees and rebates and its fees shall not depend on the trading venue where the transaction takes place.
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).
CCPs required to provide their members with simple tools allowing them to simulate the amount of collateral requested to clear future trades
CCPs required to make available a thorough description of their initial margin models to their clearing members
Institutions offering clearing service must do so under fair, reasonable and non-discriminatory (FRAND) commercial terms
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)).
According to the the European Commission’s reminder of 13 July 2020 (Notice to Stakeholders on Withdrawal of the United Kingdom and EU rules in the field of markets in financial instruments, REV1 - replacing the notice dated 8 February 2018), in the absence of the relevant agreement, without equivalence and recognition, after the end of the transition period, where previously applicable, UK based trading venues and central counterparties (CCPs) will no longer benefit from the open and non-discriminatory access to EU trading venues and EU CCPs and to EU benchmarks respectively.
Further, the European Commission reminded on 14 July 2020 in the Notice to Stakeholders on Withdrawal of the United Kingdom and EU rules in the field of post-trade financial instruments (REV1 - replacing the notice dated 8 February 2018) that, in the absence of the relevant agreement, the loss of EU authorisation of CCPs established in the United Kingdom will affect their ability to continue performing certain activities (e.g. compression) and fulfilling certain obligations (e.g. default management) with regard to contracts concluded before the end of the transition period.
A higher capital charge will apply to exposures resulting from positions in derivatives held by credit institutions and investment firms established in the EU in non-CCPs established in the EU and recognised CCPs established in a third country are recognised CCPs established in third countries. This is because only authorised qualifying CCPs (QCCPs), which have a favourable capital treatment under CRR (see Article 4(1)(88) of CRR, subject to the transitional provisions of Article 497 of CRR and Commission Implementing Regulation (EU) 2017/2241 of 6 December 2017 - transitional period for third-country CCPs until 15 June 2018).
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).
EMIR 2.2 (Regulation (EU) No 2099/2019 of the European Parliament and of the Council of 23 October 2019 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) was finally adopted in October 2019 and entered into force on 1 January 2020. It introduced new rules that enhanced the supervisory role of ESMA and EU central banks, mainly over third-country CCPs. This was considered necessary to address the growing concentration risks for the EU in third-country CCPs, in particular against the backdrop of the departure of the UK from the EU, which significantly increased the proportion of euro and other Union currency-denominated transactions cleared outside the EU.
The European Commission public consultation document of 8 February 2022 (a targeted public consultation and a call for evidence on ways to improve the attractiveness of EU CCPs and reduce the EU’s exposure to systemic non-EU CCPs) reads:
"For EU CCPs, EMIR 2.2 introduced a more pan-European approach, where the CCP Supervisory Committee established within ESMA plays a key role bringing together in a single forum the different EU CCP national competent authorities, central banks and three independent members. It also strengthened the role of colleges of supervisors and central banks.
For third-country CCPs, EMIR 2.2 introduced a new system where CCPs are tiered depending on their systemic importance to the financial stability of the EU and its Member States. While non-systemic CCPs (Tier 1 CCPs) are allowed to provide services in the EU under the supervision of their home supervisors after being recognised by ESMA, systemically important CCPs (Tier 2 CCPs) have to comply with certain EMIR requirements and are supervised by ESMA. According to EMIR 2.2 ESMA, in agreement with the relevant central banks of issue and after consulting the ESRB, can conclude that a CCP or some of its clearing services are of such substantial systemic importance that the CCP should not be recognised to provide certain clearing services or activities. Based on its assessment, ESMA can recommend that the European Commission adopt an implementing act confirming that that CCP should not be recognised to provide certain clearing services or activities, as compliance with the additional EMIR requirements would not be sufficient to safeguard the financial stability of the EU or one or more of its Member States.
On 28 September 2020 ESMA recognised three UK CCPs from 1 January 2021, with LME Clear Limited being assessed as a Tier 1 CCP and ICE Clear Europe and LCH Limited as Tier 2 CCPs.9 In December 2021 ESMA came to the conclusion that, although certain services provided by the two identified Tier 2 CCPs, LCH Ltd and ICE Clear Europe Ltd, are of a substantial systemic importance, the cost of not recognising these services would be too high compared to its benefits at this point in time. The services concerned relate to interest rate derivatives in euro and Polish zloty, as well as credit default swaps and short-term interest rate derivatives in euro."
Closing remarks and some numerical data
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, ESMA70-872942901-38
Question 1 [Last update: 07/07/2017]
When should CCPs notify the transitional arrangements foreseen in Article 35(5) of MiFIR?
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?
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.
Question 7 [Last update: 02/04/2019]
Can a third country trading venue request access to an EU CCP under Article 38 of MiFIR in the absence of an equivalence decision under Article 28(4) of MiFIR?
Article 38 of MiFIR governs third-country access requests relating to transferable securities, money market instruments and exchange-traded derivatives.
ESMA considers that an equivalence decision under Article 28(4) of MiFIR is only necessary if the third-country trading venue wishes to enter into an access arrangement with an EU CCP covering derivatives subject to the trading obligation to the extent that they are traded on a regulated market.
In the absence of an equivalence decision under Article 28(4) of MiFIR, third-country trading venues can enter into access arrangements (and maintain existing access arrangements) with EU CCPs for transferable securities, money market instruments and derivatives, to the extent that they are not subject to the trading obligation.
ESMA recalls that access requests covering derivatives traded on OTFs and MTFs are subject to the EMIR access provisions.