The European Commission has today published a legislative proposal to amend Regulation (EU) 648/2012 on OTC derivatives, central counterparties and trade repositories (“European Market Infrastructure Regulation” or EMIR) and Regulation (EU) 1095/2010 establishing a European Supervisory Authority (“Regulation establishing European Securities and Markets Authority” or ESMA Regulation) in respect of the procedures and authorities involved for the authorisation of CCPs and requirements for the recognition of third-country CCPs. A copy of the proposal and the annex are here and here.

This proposal follows the Commission’s consideration that following the UK departure from the European Union (EU) and given the large volumes of financial instruments denominated in euro and other EU currencies being cleared in third-country CCPs a disproportionate volume of euro-denominated derivatives transactions will be cleared in CCPs located outside the EU. The current proposal introduces significant changes to recognition and ongoing supervision of third-country CCPs in an attempt to address perceived shortcomings in existing supervisory arrangements.

Key points

  1. Equivalence decisions – The proposed amendments include changes to the procedure for adoption of equivalence decisions by the Commission; the proposal empowers the Commission to make an equivalence determination subject to further conditions and equips ESMA with the task of monitoring regulatory and supervisory developments in  third-country jurisdictions that have been deemed equivalent by the Commission;
  1. Two-tier classification system for third-country CCPs – The Commission proposes to amend the system of recognition of third country CCPs by introducing their classification as systemically and non-systemically important from the EU financial markets perspective (Tier 1 and Tier 2 CCPs respectively); methodology for determining the systemic importance of third-country CCPs will be based on four criteria – (1) the nature, size and complexity of business, (2) the effects of failure or disruption of a third country CCP on EU financial markets, (3) clearing membership structure and (4) a  third country CCP’s relationship, interdependencies and other interactions with financial market infrastructures;
  1. Additional requirements for Tier 2 third-country CCPs – While Tier 1 CCPs (non-systemic) will continue to be subject to the current authorisation and supervision regime, Tier 2 third-country CCPs will have to meet additional recognition criteria including – but not limited to – (1) ongoing compliance with the relevant prudential requirements applicable to EU CCPs, (2) written confirmation from the relevant EU central banks of issue certifying compliance with any additional requirements imposed by those central banks, (3) granting ESMA access to any information and business premises upon request; the enforcement system will be based on a  “comparable compliance” approach;
  1. Enhanced ESMA supervisory powers (third-country CCPs) – The Commission proposes to significantly enhance ESMA’s supervisory powers in respect of third-country CCPs, including regular reviews of recognition decisions, investigative and on-site inspection powers; recognised third-country CCPs will be obliged to pay supervisory fees to ESMA and will be subject to a periodic penalty payments regime for infringements of EMIR requirements;
  1. Enhanced ESMA supervisory powers (EU CCPs) – The proposal also reflects ESMA’s increased role in authorisation and supervision of EU CCPs, including requirements of ESMA’s prior consent in relation to decisions pertaining to access to CCPs and/or to trading venues, the authorisation and extension of services of CCPs, capital requirements, interoperability arrangements and the obligation to pay supervisory fees; the proposal also includes amendments to procedures and the organisational setup of ongoing supervision of CCPs at the ESMA level, including the creation of a CCP Executive Session with ESMA’s Board of Supervisors.

 Next steps

The proposal to amend EMIR will now be transferred to the European Parliament and to the Council for review and adoption. Both institutions will be able to propose additional amendments. NRFLLP expects the legislative process to complete in late Q4 2018.