On 7 January 2020, the European Securities and Markets Authority (ESMA) published a report on a survey it conducted into membership arrangements and due diligence by central counterparties (CCPs) towards their clearing members.

The report is aimed at Member State national competent authorities, CCPs, individuals applying as a clearing member and non-financial counterparties applying or acting as a clearing member.

The survey was in response to the default at Nasdaq Clearing AB in September 2018 of a physical person acting as a direct clearing member on the Nasdaq commodities clearing segment, highlighting the importance of membership criteria as a first line of defence of CCPs to control counterparty credit risk.

In its survey ESMA investigated the following:

  • whether individuals (i.e. a physical person, either as an individual trader or in a business capacity) can be clearing members at EU CCPs, and if so, how the CCP assesses the financial resources and operational capacities of such individuals;
  • what membership criteria EU CCPs apply and whether they apply specific criteria to non-financial counterparties as defined in the European Market Infrastructure Regulation (EMIR); and
  • how EU CCPs conduct their on-going monitoring of compliance with membership requirements (due diligence of clearing members), especially with respect to entities different from banks or investment firms.

Section III of the report presents the results of the survey with respect to individuals acting as clearing members as well as the clarification to be published by ESMA on the level of stringency in admission criteria. Section IV focuses on non-financial counterparties acting as clearing members and presents the findings of a survey on their participation in EU CCPs. Section V presents the practices that emerged from the survey as those used by EU CCPs on an ongoing basis to perform due diligence of their clearing members.

ESMA has also updated its Q&A document on the implementation of EMIR by inserting a new Q&A 23(c) on the level of stringency in admission criteria.

With regards to EU CCPs’ due diligence practices, ESMA will consider enhancing supervisory practices, possibly by some form of guidance on detailed practices.