14 November 2017

CEPS - Derivatives Clearing and Brexit: A comment on the proposed EMIR revisions

This contribution argues that the European Commission should have assessed risk management with CCPs in more detail and should have proposed a more integrated architecture for the supervision and resolution of CCPs. It further argues that the three proposals should have been part of one single package to facilitate the legislative process of such technical measures.

It is still early to make an assessment of the impact of EMIR. Although the Regulation was adopted in 2012, the regulation is not yet fully implemented, and final elements will only enter into force in mid-2018. Also the price transparency part of the derivatives trading will only come into force with MiFID II in 2018. For certain elements, however, such as the application to pension funds and non-financial corporations, the continuation of the exemptions from central clearing had to be clarified.

The most critical element missing is an in-depth analysis of risk management within CCPs. The different impact assessments accompanying the Commission proposals demonstrate that CCPs have centralised risk in OTC derivatives markets, and have increased interconnectedness between large players in that market. The reports however lack an investigation on how risk management within CCPs has functioned so far, and its implications. CCPs are supposed to be risk poolers or mutualisers, and through initial margins, variation margins and the default fund, EMIR introduced the different layers of protection, enabling CCPs to withstand stress in financial markets. How the different CCPs have implemented these provisions is not discussed in the impact assessments, nor is any comparative information available on CCPs balance sheets.

It is also regrettable that the Commission has not proposed a more integrated supervisory and resolution structure for CCPs in the EU. The June 2017 proposal, although it is called a European supervisory mechanism, mostly strengthens ESMA’s role with regard to third-party countries CCPs, but not as much within the EU. It maintains the fragmented supervisory structure for CCPs within the EU, with ESMA mostly contributing to supervisory convergence. This is even more problematic in the case of CCP resolution. If the need were to arise to resolve a CCP in the course of a weekend, a multitude of authorities would be sitting around a table, a fact that is not materially changed by any of the proposed amendments discussed above. The home country would manage and chair the resolution college, but we have seen during the financial crisis how good these colleges functioned. Only the ECB, strengthened by its proposed amendment to the ECB statutes, would be ensured a bigger role in the deliberations. It is regrettable that the EU Commission did not dare to go further, as well for the supervision and resolution of CCPs. What we have now is a very incoherent structure.

Full paper

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