EACH’s response to EC consultation on derivatives and market infrastructures
14 July 2010
The lack of global harmonisation in binding standards on CCPs’ risk management standards leads EACH to encourage further global co-ordination as legislation is being developed in different jurisdictions.
EACH would like to clarify that it supports the creation of ESMA and the other new European Supervisory Authorities (“ESAs”). Each ESA should raise standards and ensure greater consistency across the single market by implementing harmonised rules and assessing national regulators’ rule implementation, resourcing and independence.
The G20, European and national agendas are all fully aligned in wishing to bring the benefits of CCP clearing to a much larger proportion of the OTC derivatives markets. These objectives are fully supported by EACH, however EACH has specific comments on several points:
· regarding the obligation on firms to clear certain derivatives, and especially on the “top-down” proposal whereby ESMA may identify instruments that should be subject to the clearing obligation but which no CCP has yet received authorisation. EACH understands that this approach is intended to contribute to the identification of products/classes where further standardisation leading to eligibility for clearing and for the clearing obligation could be sensibly pursued. However, EACH would welcome clarification that a CCP cannot be forced to clear such products identified by ESMA, and that CCPs would be fully included in the consultation process;
· EACH foresees increasing competitive pressure on CCPs to launch clearing servicesfor instruments in order to enable firms to fulfil the obligation to clear OTC derivatives where clearing is mandatory, and potentially following the granting of interoperability rights(even though at present limited to cash instruments) to CCPs. Therefore, EACH welcomes the setting of strict requirements for CCPs to avoid a possible “race to the bottom” in the face of such competitive pressure;
· As for the requirement on CCPs to make their services available to all trading venues offering trading in derivatives subject to the clearing obligation, EACH recommends that (in line with CPSS-IOSCO guidance) CCP should be able to decide on the basis of its risk management requirements whether to connect to trading platforms for OTC derivatives; and
The lack of global harmonisation of binding standards on CCPs’ risk management standards leads EACH to encourage further global co-ordination as legislation is being developed in different jurisdictions.
EACH fully understands and support the Commission’s goal of ensuring that CCPs are as strong as possible and capable of surviving the next, not just the last, financial crisis. EACH understands public authorities’ concerns that the new obligation to clear certain OTC derivatives can only be justified if CCPs are unquestionably safer than any other counterparty. EACH recognises that the zero EAD treatment potentially available to CCPs in certain circumstances must be justified. Nevertheless EACH has concerns – elaborated in the body of the response – over the practical effects of the approach being taken, and the potential impact on all market participants.
In general, CCPs do not have legally established relationships with end-clients under their national law, though they may (for example for derivatives) be required by national law to calculate margins at end-client level. A requirement by the Commission for such legal relationships to be established could conflict with national law. While recognising the need to respect the interests of clients, particularly those that will be subject to the clearing obligation, EACH members do not wish to find themselves under any “duty of care”’ towards clients of their clearing members, or to take responsibility for the management of the default of a client, in the case where this is not already their legal or regulatory duty.
On a related point, markets cleared by CCPs are in many cases characterised by chains of intermediaries. While EACH agrees that access to CCPs by market participants on a non-discriminatory basis should be provided when access criteria are met, we would not want the impact of these proposals to limit existing intermediated structures or to force participants into becoming clearing members or clients of clearing members against their will.
It is important that the regulation of CCPs and the practical enforcement of such regulation will continue to allow CCPs to develop new and innovative solutions to reduce risks and costs for customers. The structure of the future regulation and supervision needs to take into consideration the requirement for a level playing field for CCPs operating within the EU, whilst ensuring their global competitiveness. The regulatory framework should rest on a harmonised rule book homogeneously enforced across the EU.
© EACH - European Association of Central Counterparty Clearing Houses
