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Europe's version of Basel III allows banks to treat non-EU clearers as so-called qualifying CCPs (QCCPs) until June 15, meaning cleared exposures receive a rock-bottom 2 per cent risk-weight. Market participants initially expected authorisation decisions by ESMA and the European Commission to be made by March 15, but this is a two-step process and some observers now believe it may not be complete until well after June 15. Non-EU CCPs that are not recognised as of that date face being stripped of their QCCP status, pushing risk-weights up to at least 20 per cent and resulting in a sudden increase in capital.
The confusion stems from article 25(3) of the European Market Infrastructure Regulation (EMIR) – Europe's clearing regime – which gives ESMA 180 working days from the date it receives a complete application to decide whether to accept or reject a third-country CCP's application for recognition. The deadline for third-country CCPs to apply to ESMA and gain temporary QCCP recognition was September 15, 2013, implying the process would be complete by March 15 at the latest. However, three market participants say ESMA will not consider a non-EU CCP's application complete unless its home-country supervisory regime has been approved by the EC – only then will the 180-day countdown start.
The EC's equivalence decisions have taken longer than expected. The decision is based on technical advice from ESMA, which has only been delivered for nine countries: Australia, Canada, Dubai, Hong Kong, India, Japan, Singapore, Switzerland and the US. However, many countries' rules are only set out in detail in their respective CCPs' rule books – for example, ESMA advises that the EC should only recognise US CCPs that have "adopted internal policies, procedures, rules, models and methodologies which, on a holistic basis, incorporate provisions that are broadly equivalent to the legally binding requirements for CCPs under Emir".
The EU's version of Basel III gives the EC the power to extend temporary QCCP status for six months "in exceptional circumstances where it is necessary and proportionate to avoid disruption to international financial markets". However, the EC has yet to indicate whether it will do this and did not respond to requests for comment about its intentions.
The European bank's regulatory expert says he expects the EC to use this option if the re-authorisation and third-country recognition decisions are delayed beyond June 15. "I would be very surprised if the EC allows a risk-weight hit on entities the use of which they want to incentivise, especially if the reason for such a delay and risk-weight increase would be internal to the EU", he says.
One clearing source also says ESMA is likely to have reviewed applications from the larger CCPs already, meaning it is unlikely to need 180 days to make its decisions once EC equivalence decisions are published.
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