On 14 September 2018, the Financial Markets Law Committee (FMLC) published a paper (dated July 2018), European Market Infrastructure Regulation (EMIR): the European Commission’s Legislative Proposal to Amend Procedures for recognition of Third Country Central Counterparties (the Paper).
On 14 July 2017, the European Commission (Commission) adopted a legislative proposal to amend the processes for authorisation, recognition and the supervision of Central Counterparties (CCPs) under EMIR (the Proposal). The Paper draws attention to issues within the Proposal, including amongst other things:
- the recognition process, which could give rise to uncertainties owing to the lack of clarity in the parameters and conditions for ascertaining the Systemic Importance Criteria and the Tier 2 Additional requirements;
- the relocation of third Country CCPs of substantial systemic importance;
- the reclassification of recognised third country CCPs, as ESMA has the right to withdraw recognition of a third country CCP if the criteria for recognition are no longer met; and
- the status of the UK CCPs post-Brexit, which is uncertain, as if no transitional agreement is settled between the UK and the EU, there will be no automatic equivalence of the UK regime and/or an automatic recognition or authorisation of UK entities post-Brexit.
In the Paper, the FMLC provides recommendations to help mitigate the identified issues which could impact the relevant CCPs and market participants. The recommendations include:
- the consideration of an approach of regulatory deference, where appropriate, to address the potential incompatibility of requirements applicable to TC CCPs;
- clarifying the parameters of the European Commission delegated act so as to clearly define, at an early stage, the terms and factors to be taken into account whilst classifying a third country CCP as of “systemic importance” or as of “substantial systemic importance”;
- considering in the Proposal a ‘partial recognition’ —by which a more granular approach is taken to recognition, allowing a decision in respect of specific services, activities and/or class of financial instruments of a particular third country CCP;
- considering a period of transition in the event an existing equivalence or recognition decision is to be withdrawn or subject to new requirements, to provide market participants with sufficient time to implement all the operational changes; and
- clarifying the application of the Proposal in cases where clearing members are required to transfer or close out their existing positions at a third country CCP.