The European Systemic Risk Board (ESRB) has published two reports relating to EMIR to assist the European Commission (the Commission) in fulfilling its obligation to review and provide a report on EMIR by 17 August 2015.
In the first report, on the efficiency of margining requirements to limit pro-cyclicality and the need to define additional intervention capacity, the ESRB recommends that the Commission consider:
- binding guidance on the implementation of Article 28(1)(a),(b) and (c) of the regulatory technical standards No. 153/2013 to specify: under (a) how a stressed period should be identified and incorporated into the margin calculation; under (b) what constitutes a temporary exhaustion or a significant rise in calculated margin requirements; and under (c) a method for handing the situation where the amount of stressed observations in the look-back period declines to a level below a predefined threshold;
- a less flexible framework for calibrating collateral haircuts. The ESRB proposes that the EMIR provision contains a minimum length for the look-back periods to be taken into account when estimating stress or predefined minimum haircuts;
- a documented policy by central counterparties (CCPs) on the overall tolerance for pro-cyclicality to make the overall anti-cyclical policy of CCPs transparent to their competent authorities and members of the college and, in an appropriate manner and degree of detail, to the clearing members;
- more granular transparency requirements on pro-cyclicality to allow clearing members to better anticipate and manage liquidity strains potentially triggered by calls on margins, haircuts or add-ons;
- a definition of pro-cyclicality in the EMIR Level 1 text to ensure a clear and consistent reference point for the provisions related to pro-cyclicality. The ESRB suggests considering the definition of pro-cyclicality contained in the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions’ (CPMI-IOSCO) report on Principles for Financial Market Infrastructures; and
- a further review of EMIR in 2018, specifically on the macro prudential use of margining and haircuts to address and prevent systemic risks.
In the second report, on issues to be considered in the EMIR revision other than the efficiency of margining requirements, the ESRB recommends that the Commission consider:
- a swift process for the removal or suspension of mandatory clearing obligations to ensure that CCP exposures on financial instruments that have turned illiquid will not continue to increase as fast or are reduced and limit the potentially pro-cyclical implications that follow from such exposures;
- clarifying that the evaluation of systemic risks for mandatory clearing purposes should be conducted by the European Securities and Markets Authority (ESMA) both at the EU and national level;
- replenishment of default funds and the skin-in-the-game (SIG) design. The ESRB believes that the EMIR calibration could be further enhanced by aligning the amount of SIG held by a CCP with the level of the CCP’s clearing activity in order to ensure that incentives are in some way proportionate to the quantitative dimension of the risks it manages;
- transparency requirements consistent with guidance developed at the international level. The ESRB recommends that CCPs be legally obligated to publish quantitative and qualitative requirements consistent with the CPMI-IOSCO disclosure framework;
- publication of a list of approved interoperability arrangements by ESMA to improve the transparency for regulators and market participants about existing interlinkages between financial market infrastructures; and
- broadened access to trade repository data to allow national authorities to have access to data of all subsidiaries of entities within their respective jurisdictions.