On 7 February 2024, negotiators from the European Parliament’s Economic and Monetary Affairs Committee reached a provisional agreement with the Belgian presidency of the Council of the EU on a review of the European market infrastructure regulation and directive.

Main elements of the provisional agreement

The main elements of the provisional agreement are:

  • Adequate supervisory framework -The agreement aims to provide an adequate supervisory framework, with more effective information sharing, coordination and a bolstered role for the European Securities and Markets Authority (ESMA) in the day-to-day supervision of EU central counterparties (CCPs).The agreement further strengthens ESMA’s role through providing it with a coordination role in emergency situations. ESMA will also assume the role of co-chair of supervisory colleges, together with relevant Member State competent authorities (NCAs). ESMA will be able to issue a reasoned opinion on an annual review and evaluation of CCPs. Annual onsite inspections of a CCP by NCAs will be mandatory and ESMA will be able to participate in them.
  • Active account requirement – Negotiators agreed that financial counterparties or non-financial counterparties (NFCs) that are subject to the clearing obligation should hold at least one active account at a CCP established in the EU and regularly clear through it at least five trades in each of the most relevant subcategories per class of derivative contract, as defined by ESMA. An account is considered active if it posts initial and daily variation margins, has in place the necessary IT connectivity, internal processes, legal documentation, stress tests, and can demonstrate its functioning would not be affected in the event of a significant and sudden increase in clearing activity. A Joint Monitoring Mechanism is created to keep track of this new requirement. The European Commission secured a clear mandate to adopt further measures, if necessary, in several years to address EU reliance on third country CCPs.
  • NFCs – The largest NFC should be monitored effectively regarding intergroup transactions, as they may contribute to financial stability risks. For an NFC to be part of a group that benefits from the intragroup reporting exemption, its EU parent undertaking would report net aggregate positions of that NFC by class of derivatives to its NCA. The NCA would then share the information with ESMA.
  • Transparency – The clients of the EU CCPs, as well as recognised third country CCPs, should be informed about an option to clear a derivative contract in an EU CCP, which should be transparent on fees, risks associated with the service provided and volumes of cleared transactions.

Following the provisional agreement, Danuta Hubner (the lead MEP) said:

“The changes we agreed will also enhance the competences of ESMA, giving the European supervisor a key role in overseeing EU CCPs. We are paving the way for a reduction in exposure towards third country CCPs, requiring counterparties to hold an active account at a European CCP and clear a determined number of trades through that account. We are also asking the Commission to take further measures in two years’ time, if necessary, following a thorough assessment by ESMA.”

Next steps

The provisional agreement is subject to approval by the Council and the European Parliament before going through the formal adoption procedure and entering into force.

Comment

It is interesting to see that the EU institutions have landed on a provisional agreement on EU clearing. The things that will most interest the market are the continuation of the requirement for financial counterparties and those non-financial counterparties in scope to have at least one active account at an EU CCP, the requirement for monitoring intra group transactions and for informing customers of EU clearing options. It is fair to say that this agreement falls into a much larger debate about EU versus non-EU clearing and how this fits within a global clearing model. It is also part of the bigger picture of the issues on cross border services and third country access to the EU. It seems fairly clear that policy makers have been trying to balance the push towards certainty of outcome in the EU against participation in global markets pre and post trade. As always, the elephant in the room is how this all plays into the US policy making arena where there are similar tensions.