Nasdaq Clearing
Nasdaq Clearing agrees with the intent of the draft RTS to offer appropriate protection to indirect clients, including indirect clients further down a longer chain. Nasdaq Clearing also understands that the indirect client must be given a choice between at least two account types and they agree in principal that the choice can be between omnibus net and omnibus gross, with the added option for the direct client/member to offer individually segregated accounts if this is agreed and requested by the indirect client, as proposed in the draft RTS.
Nasdaq Clearing has a joint account model for OTC and ETD and they are in favour of applying the same choices of accounts for OTC and ETD.
Nasdaq Clearing understands from the draft RTS that the proposed minimum requirement would be for the CCP to hold separate omnibus accounts (net or gross) for each direct client offering indirect clearing. Their understanding of the proposed solution implies a proliferation of accounts, mainly at the CCP and the clearing member, not least in the case of a longer chain where the member has multiple direct clients, with multiple indirect clients etc. [...]
Nasdaq Clearing considers that in order to avoid the negative consequences described above, the ideal solution would be to allow single omnibus accounts to be held at member level, i.e. one net and/or gross omnibus account per member, at the CCP. [...]
If, despite broad industry support, this option is not chosen by ESMA, Nasdaq Clearing would like to propose a solution based on allowing a single gross omnibus account per member, as a third minimum alternative, in addition to the two omnibus alternatives described by ESMA in the draft RTS (i.e. omnibus accounts held at direct client level). [...]
In relation to all alternatives, the direct client must ask its clearing member to hold its house positions and collateral in an account with the CCP that is separate from the account where the direct client’s indirect client positions and collateral are held. This account can be an omnibus account where the house positions and collateral for the member’s other direct clients are also held. This is in line with our understanding of the draft RTS. [...]
One single omnibus gross account would be set up for a member, with the CCP, holding the positions and collateral for all the indirect clients under the member. The account could thus hold positions and accounts for indirect clients belonging to different direct clients, but only those direct clients belonging to the particular member.
The member would be responsible for allocating positions to each indirect client, in the CCP system (e.g. in position sub-accounts). The CCP would calculate a margin requirement for each indirect client and aggregate these requirements to a single gross amount per omnibus account. The member would be responsible for posting this amount to the corresponding collateral account (i.e. one single collateral account per member for its indirect clients). As indicated in the draft RTS, the handling of excess collateral would be regulated in the agreement between the direct and indirect clients, implying that excess would normally not be posted to the CCP for indirect clients. [...]
In the default of a direct client, the indirect clients belonging to the defaulting direct client would have the possibility to attempt to port positions and collateral to another direct client belonging to the member for which the gross omnibus account has been set up. [...]
Porting to a direct client of a different member would also be possible, but the likelihood of this succeeding would be lower than the likelihood of porting to a direct client belonging to the same member. The reason for this is that the porting would be more complex and would require an agreement between the give-up and take-up member on collateral value and unrealised settlement obligations.
Nasdaq Clearing is of the view that this model would provide appropriate protection for the indirect client, as both the position and the collateral value of each individual indirect client would be held at the CCP and porting would at least be more likely compared to the alternative involving a net omnibus model. It should still be noted that porting of collateral in any omnibus account is less likely to succeed compared to porting of an individually segregated account.
Full Nasdaq response
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European Association of CCP Clearing Houses
EACH agrees with the overall objective of providing adequate protection to indirect clients, including those indirect clients that are part of longer chains. [...] They agree with the need for indirect clients to be offered a choice of account types and support the proposed choice of a Net Omnibus Account Structure (NOSA) or a Gross Omnibus Account Structure (GOSA), with collateral held at the CCP, as a minimum. [...]
EACH has concerns with regard to the degree of application of the NOSA and GOSA structures and proposes an alternative
EACH however has concerns with regard to the level of depth in the application of the NOSA and GOSA structures and therefore propose two alternatives:
Alternative A: Each clearing member to open a single NOSA and/or GOSA at the CCP to hold the assets and positions of all of its indirect clients. [...]
This is the preferred option as we understand it gathers the broadest industry support, including clearing members and CCPs.
Under this option, it should be sufficient for each clearing member to open a single NOSA and/or GOSA at the CCP for holding the assets and positions of all of its indirect clients. In exceptional circumstances, and if well justified by the clearing member, the CCP should consider to open additional NOSA and/or GOSA
Alternative B - A single gross omnibus account per member for all its indirect clients
If, despite the broad industry support, Alternative A above was not considered by ESMA, EACH believes that a second best alternative would be to offer a second option, in addition to the choice of net and gross OSA described above. This option would be a single gross omnibus account per member for all its indirect clients.
One single omnibus gross account would be set up for a member, with the CCP, holding the positions and collateral for all the indirect clients under the member. The account could thus hold positions and accounts for indirect clients belonging to different direct clients, but only those direct clients belonging to the particular member.
The member would be responsible for allocating positions to each indirect client, in the CCP system (e.g. in position sub-accounts). The CCP would calculate a margin requirement for each indirect client and aggregate these requirements to a single gross amount per omnibus account. The member would be responsible for posting this amount to the corresponding collateral account (i.e. one single collateral account per member for its indirect clients). As indicated in the draft RTS, the handling of excess collateral would be regulated in the agreement between the direct and indirect clients, implying that excess would normally not be posted to the CCP for indirect clients. Any excess collateral posted to the member’s indirect client collateral account with the CCP would not be automatically allocated to an individual indirect client and would be subject to fellowship risk between the indirect clients belonging to that member. [...]
EACH is of the view that this model would provide appropriate protection for the indirect client, as both the position and the collateral value of each individual indirect client would be held at the CCP and porting would at least be more likely compared to the alternative involving a net omnibus model. It should still be noted that porting of collateral in any omnibus account is less likely to succeed compared to porting of an individually segregated account.
EACH believes that the final RTS should clarify that one client’s collateral value may be at risk from losses on another client’s positions at the point the account is liquidated
Full EACH response
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Federation of European Securities Exchanges
FESE agrees with the overall objective of providing adequate protection to indirect clients, including those indirect clients that are part of longer chains. They agree with the need for clients to be offered a choice of account types but support flexibility on the selection of an omnibus account structure, i.e. Net Omnibus Account Structure (NOSA) or a Gross Omnibus Account Structure (GOSA), but not both as mandatory. While FESE understands it is not a minimum requirement, they also believe that the direct client or clearing member should be offered a choice of individually segregated accounts subject to the agreement and request of the indirect client.
Full FESE response
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EACB
EACB supports the exclusion from EMIR central clearing of all non- systemically important firms – that is also smaller Financial Counterparties (FC) and not just the Non- Financial Counterparties (NFC). Indeed, small and medium-sized FCs have severe problems to enter into clearing relationship, due to both cost and availability issues. Indirect or client clearing offerings have not proven to be successful due to legal and practical challenges. Only a small number of clearing members are able to offer to clear on behalf of smaller counterparties but at a cost totally disproportionate compared to the business of smaller players. In that regard, the EACB also draws to the Commission's attention that the current EU regime under EMIR is far more burdensome for small banks than in other major jurisdictions.
To address the issue the EACB proposal is, in principle, to exempt small credit institutions from the clearing obligation in respect of hedging contracts only. In the EACB’s view this principle provides the best and most proportionate trade-off between on the one hand systemic risk and financial stability considerations, and on the other hand minimising the burden and anti-competitive effect of EMIR on small institutions. This could be achieved through the on-going EMIR review process. As international comparisons indicate, there are various ways to implement this principle through specific exemption thresholds. The EACB’s view is that the simplest and most satisfactory approach is to set an exemption threshold based on balance sheet size of the institution. EACB would propose to set this at € 8 billion – close to the equivalent exemption threshold of US$ 10 billion for small US banks. At the very least, this should be set no lower than € 5 billion.
The European Institutions hoped that indirect clearing would help provide alternative access route to CCPs, but there has been no sign in that direction so far. Authoritative industry bodies such as FIA have tried to analyse this issue. FIA addressed this issue in their June 2015 paper, identifying the requirement for the “leapfrog” payment as the major technical block to indirect clearing because of the possible conflict between this requirement and local insolvency law. FIA also advocated giving indirect clients a choice as to the level of segregation, and credit protection, they wish to benefit from. However, they cannot conclude that removing the regulatory barriers will necessarily bring in a wave of indirect clearing services relevant to our smaller members. Just as with direct clearing, the business of low-volume end-clients may turn out to be inherently unprofitable. Moreover, there is always an additional and more general concern that any clearing provider could in future decide that the business is unattractive and find ways to exit. Already the direct clearing market has shrunk as a result of major firms withdrawing. This situation is likely due to:
- the distinctive role Regulation placed on the centralization of liquidity and risks via clearing;
- the lack of homogeneousness in the CCPs’ worldwide mutual recognition that made a number of Clearing Brokers (CB) re-consider whether to offer such services in future, and made the few ones remaining and offering such service demand higher fees.
- other regulatory initiatives which are burdensome on the “European model” of clearing, e.g. Leverage Ratio , Financial transaction tax, net stable funding ratio.
It should also be noted, that indirect clearing (if it ever works) could provide a useful mode of access to central clearing for small FCs, for whom dealing direct with a clearing member of a CCP is not cost-effective for either side. But indirect clearing still ultimately relys on the clearing capacity of CCP members – it does not, and cannot, of itself add any overall capacity. The contribution of indirect clearing could be that a small FC’s trades cleared indirectly would benefit from the CCP access, and finer transaction processing costs, available to the much larger head client. At the same time, handling the indirect clearing must be sufficiently worthwhile both to the head client and to the clearing member that the head client uses – potentially there are two lots of transaction processing costs for each trade. Nevertheless, if all other circumstance are favourable, we agree that mitigating the specific regulatory obstacles to indirect clearing would be helpful – this is, they think, a necessary, but not a sufficient , condition for indirect clearing to emerge as a meaningful alternative for small FCs.
Eventually, the lack of players offering access to clearing indirectly is already showing the potential to lead to a concentration of positions/risk within very few Clearing Member, having the opposite effect of what EMIR originally intended. Such liquidity concentration is already evidenced in the market and will further develop when the clearing requirements kicks in. This has huge consequences (among others regarding pricing and liquidity) for smaller cooperative banks and building societies as well as for NFC- as it leaves them with more difficult access to hedging possibilities in general.
Full EACB response
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AFG
AFG cannot follow ESMA’s conclusion to modify the terms of the choice, as defined in article 39 of EMIR, to be offered by CCPs and Clearing Members to their clients between Omnibus (OSA) or segregated accounts (ISA). Article 39 further notes in §6 that excess margin are transferred to the CCP in case of ISA. As pointed out by ESMA in § 29 of the consultation document, clients demand more segregation for OTC derivatives than for ETD. AFG expected ESMA to take it as a clear indication that ISA has to be kept as the most adequate solution and should be mandatorily offered to clients (that is level 1 text) and indirect clients. In §30 ESMA takes into account the point that some respondents to the MIFIR consultations, which related to ETD, feared that segregation would bring excessive complexity and, hence, excessive cost. Facing this point AFG would suggest that ESMA, as the competent authority, take the view to find a solution that would favour the interest of investors protection and work on solutions to circumvent or reduce “factors that may limit the take up” of ISA especially for OTC transactions.
There are some points worthwhile mentioning:
· About complexity: AFG feels that when information is required to be transferred to CCP at the level of each individual end client the most efficient way to proceed is to segregate accounts and open individual accounts in the books of the CCP; reconciliation will be largely facilitated and the level of operational risk eventually reduced ;
· About risk : AFG sees as a positive arbitrage the fact to open individual accounts at the CCP in order to identify the positions of each clients (which is claimed to be burdensome) and the advantage that results to the buy side in terms of transparency and efficiency of controls that eventually reduces the overall risk;
· About cost: AFG is very concerned that clearing members may consider as non-profitable the provision of clearing or indirect clearing services to clients; we think that most of its results from the heavier constraints imposed by the banking regulations currently under way and fear that they may reach unintended negative consequences; we do not see that, except for a marginal increase in setup cost, the running cost of ISA should be higher than OSA; conversely we do see advantage for the clearing member to use OSA and we feel that it is detrimental to investor protection and at the cost of a higher risk on financial stability.
Hence, AFG urges regulators to be extremely attentive to the issue of ISA when implementing the central clearing obligation.
However, AFG agrees with the approach of promoting a gross omnibus indirect account with new requirements to compensate for other protections of the indirect client that have been reduced by the change in the choice of account. The security of the indirect client having a gross omnibus account seems improved thanks to the information requirement on the positions of the indirect client to the CCP (i.e. a clear identification of position of indirect clients) and the requirement that each margin is calculated separately for each indirect client which will facilitate the safe return of the collateral to the indirect client in case of default.
AFG considers that there is a weakness of the gross omnibus indirect account because the excess margin is kept at the Client level subject to the terms of the indirect clearing arrangement, whereas in the individual segregation model, excess margin is to be transferred to the CCP pursuant to the terms of EMIR. Therefore, they consider that additional regulatory requirements should be enacted to ensure that excess margin will be as limited as possible.
Full AFG response
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Consultation paper
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