ESMA recommended that initial margins for derivatives trades be held by securities settlement systems – also known as Central Securities Depository (CSD) – that ensure the "full protection" of those financial instruments.
ESMA also granted clearing houses – also called Central Counterparties (CCPs) – some flexibility, allowing them to hold securities posted as collateral with a custodian bank in the case where a CCP could not access a CSD, and where the protection of the CCP itself or of its clients was not ensured.
"If a CCP is able to demonstrate that it cannot access a security settlement system that ensures the full protection of financial instruments, then the CCP can deposit financial instruments through highly secured arrangements with authorised financial institutions", ESMA added.
Additionally, ESMA refuted the argument put forward by some market players that CSDs, contrary to custodians, could not offer segregated accounts to hold non-cash collateral posted by end-user clients, as this had previously been requested by pension funds.
Under the new EMIR rules, market players using derivatives will be required to centrally clear their trades, at least those for which clearing houses have put in place clearing platforms, such as interest rate swaps and Credit Default Swaps (CDS).
Andrew Lamb, chief executive at CME Clearing Europe, said that if ESMA allowed CSDs only to hold non-cash collateral, this could have an impact on the tri-party agreements CCPs have already put in place with custodian banks to offer segregated accounts to their clients.
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