07 December 2022

Questions and Answers on the Commission's new proposals to make clearing services in the EU more attractive

Today's proposal amends EMIR and makes targeted amendments to the prudential frameworks for banks (the Capital Requirements Regulation, the Capital Requirements Directive) and for investment firms (the Investment Firms Directive) as well as to UCITS Directive and MMF Regulation.

What are central counterparties (CCPs)?

A central counterparty (CCP) is an entity that reduces systemic risk and enhances financial stability by standing between the two counterparties in a derivatives contract (i.e. acting as buyer to the seller and seller to the buyer of risk). A CCP's main purpose is to manage the risk that could arise if one of the counterparties defaults on the deal. Central clearing is key for financial stability by mitigating credit risk for financial firms, reducing contagion risks in the financial sector, and increasing market transparency.

What is the Commission proposing today?

Today's proposal amends the European Market Infrastructure Regulation (EMIR) and makes targeted amendments to the prudential frameworks for banks (the Capital Requirements Regulation, the Capital Requirements Directive) and for investment firms (the Investment Firms Directive) as well as to the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive and the Money Market Funds (MMF) Regulation.

The aim of today's package is:

• To encourage clearing in the EU and to improve the attractiveness of EU CCPs by simplifying the procedures for CCPs when launching new products and changing risk models. It does so by introducing a non-objection approval for certain changes that do not increase the risks for the CCP. This will allow EU CCPs to offer new products for clearing and introduce model changes more quickly, therefore making EU CCPs more attractive, while ensuring adequate risk considerations are upheld and without endangering financial stability. For example, a CCP would like to request an extension of services to add a new EU currency to a class of financial instruments already covered by its existing authorisation. In the past, it would have needed to go through a full authorisation process (taking between months and up to two years in certain cases). Under today's proposal (for the non-objection procedure), the CCP will be informed within 10 working days if the competent authority objects to such extension.
• To make EU CCPs more resilient and to draw the lessons from recent developments in energy markets by further enhancing the existing supervisory framework. This will ensure risks to the EU's CCPs continue to be mitigated in light of new challenges and that the EU's central clearing system continues to be able withstand economic shocks.
• To strengthen EU open strategic autonomy and safeguard financial stability by requiring clearing members and clients to hold, directly or indirectly, an active account at EU CCPs, and reduce excessive reliance on systemically important third-country CCPs.

Why is the proposal needed?

Today's package aims to improve the central clearing system in the EU, making EU CCPs more efficient and attractive. It addresses the vulnerabilities that stem from the current excessive reliance on certain third-country CCPs deemed to be substantially systemic for the EU, ensuring that the EU has a competitive and efficient clearing system that is safe and resilient.

The Commission, as well as the European Securities Markets Authority (ESMA), have previously expressed concerns about the possible financial stability risks associated with the excessive reliance of EU financial markets on a few CCPs based in the UK. The Commission has repeatedly invited market participants to reduce their excessive reliance to such CCPs.

In addition, the energy crisis has affected the real economy in the EU and had ramifications on certain areas of financial markets, including clearing. This crisis brought to light the difficulties certain energy firms are facing in order to meet CCP margin calls.

What impact will it have?

Overall, the proposed measures will have a positive impact by:

• improving the attractiveness of EU CCPs; 
• safeguarding EU financial stability in the EU and in a cross-border context, reducing the excessive reliance on third-country CCPs; and
• ensuring safe, robust and competitive post-trade arrangements, in particular central clearing, further strengthening CMU and contributing to deep and liquid EU capital markets.

EU CCPs will benefit from being able to quickly bring new products to the market and consequently meeting the demands for new clearing offers by clearing members and clients.  In addition, they will be able to adapt the models they use to measure the risks they face more quickly, allowing a timely management of such risks.

Clearing members (mainly banks) will benefit from extended, faster clearing offers by CCPs, thereby providing more choices on where to clear.

Clients – such as non-financial corporates or financial market participants - will benefit from:

• more transparency on margin models and collateral requirements;
• information on where to clear certain contracts that can be cleared both at a third-country CCP and at an EU CCP; and
• the possibility to use bank and public guarantees.

What will be the impact for corporates?   

Corporates will benefit from the measures aimed at making central clearing safer, including:

• the proposed measures to increase the transparency of CCPs' margin calls will make it easier to predict margin calls and prepare how to meet such requests.
• the provisions concerning the calculation of the clearing thresholds will be reviewed to take into account the concerns expressed in the past months by firms, in particular firms active in commodity derivatives, to better reflect, where needed, different types of commodities, and should improve their situation in terms of the clearing thresholds without endangering financial stability.

At the same time, corporates will need to meet robust requirements if they want to become direct clearing members at a CCP, as the lack of intermediation by a financial firm such as a bank could leave them exposed to liquidity risks due to collateral requirements that can be volatile in a stressed situation.

In addition, corporates will be subject to reporting requirements related to their intragroup trades, to allow authorities to have a comprehensive picture of their activities as proposed by ESMA in its recent letter to the Commission.

What are the elements of the package that respond to the energy crisis?

The package includes the following main measures to improve the framework following the recent energy crisis:

• improved transparency of CCPs' margin models;
• improved CCP participation requirements to be met by corporates;
• broadening of CCP eligible collateral to include public guarantees and bank guarantees;
• reporting requirements on the intragroup derivative exposures of corporates;
• improved calculation and review of the clearing thresholds;
• greater consideration of the impacts of intraday margin calls by CCPs and greater focus on avoiding procyclical collateral haircuts;
• revision of the hedging criteria to ensure they remain appropriate in light of market developments....

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