31 July 2019

ESMA publishes responses to its EMIR 2.2 consultations

Criteria for tiering

U.S. Chamber of Commerce, Center for Capital Markets Competitiveness

While US Chamber of Commerce understands the need to protect against financial stability risks posed to the European Union, we caution against extraterritorially imposing EU regulation on third countries, which could lead to market fragmentation.

The Board of the International Organization of Securities Commission published in June a report on “Market Fragmentation & Cross-Border Regulation,” In the report, IOSCO acknowledges that “The use of deference and the tools associated with this concept (e.g., passporting, substituted compliance, recognition/equivalence)…can contribute to mitigating the risk of fragmentation for global cross-border markets.”

ESMA Chairman Steven Maijoor referenced the IOSCO report at the CFTC MRAC Subcommittee meeting on June 12, 2019, noting that the increased use of equivalence, mutual recognition, substituted compliance, and passporting has benefited efficiency in the financial markets. He added that reliance on home country regulation is important to avoid market fragmentation. We agree and appreciate the Chairman’s support of this report.

However, US Chamber of Commerce is concerned that the amendments to EMIR would not adequately rely on home country regulation and could lead to market fragmentation and increased costs for EU market participants.

The amendments to EMIR would give ESMA the discretion to impose EU rules directly on CCPs in jurisdctions that have already been determined to have equivalent regulatory frameworks. Application of duplicative, and in many cases conflicting rules to the entirety of a third country CCP’s global clearing activities would increase the cost of clearing globally, likely reduce the number of CCPs willing to serve the EU markets, and result in reduced liquidity for EU customers. The cost of clearing would be higher because the over-the-counter (OTC) derivatives contracts subject to the EMIR clearing obligation would need to be cleared in a less liquid EU market. This extra cost would likely be passed on by the CCPs to their clients. EU counterparties using non-EU markets would not be able to use non-qualifying CCPs because the capital costs of facing such a CCP would be uneconomical.

U.S. lawmakers and market participants expressed many of these concerns at a Congressional hearing held by the U.S. House Agriculture Committee, Subcommittee on Commodity Exchanges, Energy, and Credit on June 26, 2019. Subcommittee Ranking Member Austin Scott (R-GA) cautioned that EMIR 2.2 could result in conflicts and legal uncertainty, leading to less liquidity and more risk. Subcommittee Chairman David Scott (D-GA) echoed concerns regarding the potential dangers to the U.S. financial industry.

US Chamber of Commerce encourages ESMA to ensure the amendments to EMIR are properly calibrated to avoid any unintended consequences which would restrict market participants’ access to third country service providers and lead to market fragmentation.

Full US Chamber of Commerce response

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The London Stock Exchange Group

Although LSEG is generally supportive of a principles-based approach, ESMA’s approach involves the collection of a large amount of information and it is unclear how some of this information relates to the criteria indicated in Article 25(2a) or would allow ESMA to assess the systemic relevance of a Third Country (“TC-CCP”) for the European Union (“EU”).

It believes ESMA should clarify how the indicators chosen facilitate the determination of the systemic importance of a CCP for the EU, especially given that they are not described in a measurable way. The indicators set out information to be gathered from the TC-CCP, but do not provide any indication whether each response would suggest a greater or lesser systemic importance of the TC-PPC to the EU or how ESMA would use that information to come to a conclusion in that regard. It believes that further clarity in this regard should be provided.

LSEG believes that priorities should be assigned to the indicators as a means to identify those which are more important to the assessment. This would make the tiering assessment more predictable.

In line with this, ESMA should have a subset list of information linked to these indicators for all CCPs as a starting point. At a second stage ESMA could ask for the full set of information only from those CCPs that may be more complex and likely to be deemed Tier 2.

LSEG believes that the relevance of specific indicators defined to assess the categories set out in primary legislation is unclear in several cases. For example, the choice of indicators to assess the impact of failure or disruption of a TC-CCP seem to relate to CCP’s risk management procedures rather than the impact of failure or disruption of a TC-CCP on EU.

Full LSEG response

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Responses regarding criteria for tiering

Full consultation paper on tiering criteria

Comparable Compliance

CME Group

EMIR 2.2 requires that a framework for comparable compliance be established for non-E.U. CCPs designated as systemically important to the E.U. — which under EMIR 2.2 should be applied in accordance with the long-standing principle of mutual regulatory deference.  In contrast, the Consultation Report sets forth an inconsistent and deleterious approach to making the EMIR 2.2 required comparability assessments for those non-E.U. CCPs designated as systemically important to the E.U.  Ignoring the assessment mechanism embodied in EMIR 2.2 based on comparable regulation to assess non-E.U. CCPs based on their overall regulatory structures, ESMA’s proposed approach departs from traditional notions of comparability by mandating that non-E.U. CCPs designated systemically important to the E.U. comply with the majority of specific laws and regulations adopted for E.U. CCPs under EMIR.  In particular, by proposing a requirement-by-requirement approach for determining comparability, rather than a truly outcomes-based approach, ESMA has disregarded the notion of “mutual recognition” based on comparability, and replaced that with rigid conformity to E.U. requirements.  This requirement-by-requirement, “one size fits all” approach ignores the goal of achieving desired regulatory outcomes that accord with international standards.  It also ignores that regulatory regimes will necessarily differ jurisdiction-to-jurisdiction, and that these differences do not necessarily amount to deficiencies and must be allowed for inherently international markets to function.

Put simply, ESMA's proposed approach disregards the fact that the E.U. has already determined some jurisdictions’ regulatory regimes to be "equivalent" and therefore at least “comparable.”  Replacing those determinations, such as the 2016 CFTC-E.U. agreement, with ESMA's new requirement-by-requirement "identical" regulation review would be contrary to the intent underlying EMIR 2.2 as we understand it.  Further, for identified “core” provisions, ESMA proposes to mandate that the requirements of the non-E.U. CCP’s home jurisdiction be equal to or at least as stringent as the corresponding E.U. requirements at all times.  This results in the direct application of the “core” provisions by non-E.U. CCPs either as their primary standard or a floor to their risk management practices.  For this reason, ESMA’s proposed comparable compliance standards represent a step backward from the international regulatory deference on which markets have relied and international trust has been built.

Full CME Group response

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LME Clear

LME Clear supports the concept of Comparable Compliance.  LME Clear also supports the continuation of the two stage approach whereby the jurisdiction is assessed as equivalent by the European Commission before the CCP itself is assessed for Comparable Compliance by ESMA.

LME Clear considers the application of the regime for UK CCPs should be considered as a special case given they are all currently subject to, and authorised under, EMIR.  Further, given the UK’s intention to copy out EMIR into UK Law directly, we consider such an application for Comparable Compliance from a UK TC-CCP should generally be considered as likely to meet the relevant requirements.

LME Clear also makes the following observations on which we suggest further clarity is needed in order to enable TC-CCPs to prepare for the new regime:

LME Clear supports an outcomes-based approach as opposed to requiring narrow line-by-line parity.  A regime that operates taking into account regulatory judgement and outcomes, as opposed to relying on narrow lists of requirements, will better facilitate a workable regime and enable consideration of the nuances and intricacies of particular products and markets whilst still ensuring the policy objective of enabling the EU to focus on those entities that pose greatest systemic risk to the financial stability of the EU (or one or more of the Member States).  This would be consistent with other jurisdictions in which many global CCPs operate.  We therefore think it important there is a greater emphasis and clarity on the extent to which outcomes are considered in making determinations.  Further, we believe that, where appropriate, consideration should be given to how the CCP operates in the EU currently when considering what additional supervision under EMIR 2.2 would be appropriate.

Full LME Clear response

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Responses regarding comparable compliance

Full consultation paper on comparable compliance

ESMA fees for Third-Country CCPs

Six x-clear AG

Equities issuance and trading, and subsequent finality through clearing and settlement, is an essential component of a sound and vibrant economy. As the costs for accessing these have gone down over the years, to the benefit of those wishing to raise funds or seek returns on investment, the margins for suppliers have been sharply compressed for this asset segment. Simultaneously the regulatory compliance costs have risen significantly, and for CCP entities with turnover in the range of EUR 20 – 30 mio p.a. (such as for SIX x-clear and its primary competitors) additional costs at the levels envisaged in these consultations, can become an existential issue.  We therefore strongly recommend that fees and charges be assessed by clearing segment and proportionate to CCP operating income (stemming from EU activities).

ESMA should also be cognisant of the fact that third country national competent authorities may also take note of the processes proposed and levels of fees suggested in these consultations. As a result they may seek to adjust their own regimes to reflect the increased level of oversight necessary and adjust the fee levels accordingly. It should not be forgotten that EU CCPs also operate in third country jurisdictions. We would expect third country national competent authorities to be reciprocally engaged (in any collective activities by authorities), and potentially apply similar tiering, charging and equivalence assessment regimes.

Full Six x-clear AG response

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Amundi

On comparable compliance: ESMA chooses option A (a unique discount of 20% on the annual fee for TC CCPs with comparable compliance) and disregards option B (a discount rate of 15 or 35 % according to the level of comparable compliance applicable). Considering simplicity option A is undoubtedly preferable, since it is diffciult to define what will be low or high comparable compliance. However, it may prompt some tier 2 TC CCPs to ask for comparable compliance on a limited or very limited scope with the objective to benefit from a discount on their annual fee. ESMA should introduce a reference to a minimum and reasonable level of comparable compliance when granting the option A discount.

On withdrawal of recognition: § 105 foresees the case where recognition is finally not withdrawn to decide that no reimbursement will take place. It should be clarified that this case applies to a TC CCP which first asks for de-recognition and then withdraws its application and prefers to continue being recognised for one, sevefral or all of its services. ESMA has not the power to deny de-recognition to a TC CCP that expresses the will to have its recognition withdrawn.

Full Amundi response

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Responses regarding ESMA fees for Third-Country CCPs

Full consultation paper on EMIR_2_2_CCP fees

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