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The spread of mandatory central clearing of OTC derivatives following the G 20 summit held in Pittsburgh in 2009 has greatly increased the importance of Central Clearing Counterparties (CCPs) in our financial system. As more transactions are cleared through CCPs, more risk becomes concentrated in those pieces of financial market infrastructure. Since CCPs are highly interconnected with each other and with other pieces of financial market infrastructure all along the post-trading chain, they have become systemic elements of financial markets, warranting specific attention and regulation.
Therefore, it has become crucial that the CCPs are subject to effective regulation concerning their activities, but also to effective and efficient enforcement of this regulation by competent supervisors.
The specific nature of the activities of CCPs also calls for a specific type of supervision, that would mix some elements of capital market supervision with clear elements of prudential supervision, looking into the institution itself and its models.
The 2012 European Market Infrastructure Regulation (EMIR) established the regulatory framework for CCPs. In order to take into account the cross-border dimension of the activities of CCPs and their interconnectedness with the rest of the financial sector, EMIR already foresaw in 2012 a coordination role between national competent authorities (NCAs) for the European Securities Market Authorities (ESMA). It also foresaw the existence of colleges where national competent authorities of CCPs, supervisors of entities having relationships with the CCPs such as clearing members or linked financial market infrastructures and central banks could exchange information and coordinate their activities.
In view of the increased role of CCPs and of their limited number in the Union, a move towards a more European approach to the supervision of CCPs seems today appropriate and could allow to achieve economies of scale for supervisors as well as to take better into account the cross border externalities arising from the activities of CCPs.
The rapporteur is therefore supportive of the approach of the Commission in which the European level, represented by ESMA, would be able to check the decisions taken by national supervisors and amend or object to them should this This solution allows to take into account the local knowledge of competent authorities, that will remain in charge of preparing the decisions, while enabling the European interest to override national concerns in situations where this is necessary.
The rapporteur also recognises the need for the involvement of central banks of issue of the main currencies of the financial instruments cleared in the supervision of CCPs, as proposed by the Commission. Bringing the prospective of central banks in the supervision of CCPs and requiring their consent on some decisions concerning the supervision of CCPs is necessary as the actions taken by CCPs in areas such as liquidity or settlement might interact with the conduct of monetary policy.
The rapporteur underlines in regard that a fine balance needs to be found and that the role of central banks need to be properly calibrated so as to give them a say over exactly those supervisory decisions that might have an implications for monetary policy. This is a debate that is opened in this report and will continue on the occasion of discussions on the proposed amendment to Article 22 of the statute of the ECB/ESCB.
The rapporteur also recognises the need for a specific solution within ESMA for the supervision of CCPs, taking into account the peculiarities of CCP’s business.
However, the rapporteur believes that the option of an internal CCP Supervisory Committee within ESMA that would be specifically entrusted with all tasks related to the supervision of CCPs would be a more proportionate option than this of a wholly new ESMA configuration such as the executive session proposed by the Commission. This solution would work independently of any potential future changes to the organisation of ESMA and be easier to integrate smoothly within the structure of ESMA.
In order to ensure a linkage between the new structure and the rest of ESMA, The rapporteur proposes a decision-making procedure in which the decisions of the CCP Supervisory Committee would be subject to the non-objection of ESMA Board of Supervisors.
The rapporteur underlines in this regards that it is crucial that the new body tasked with the supervision of CCPs within ESMA deals with all issues relating to the supervision of CCPs, whether Union CCPs or third country CCPs.
In parallel to the evolutions of CCPs and of their supervision within the EU, one of the major weaknesses of the current EMIR was the regime applying to third country CCPs recognised by ESMA and allowed to provide clearing services in the Union. This regime was too weak and over-reliant on the third country supervisory authorities and was therefore not suited to the case of large third country CCPs with activities in the Union that could be of systemic importance for the Union financial system.
Your rapporteur is therefore pleased that the Commission proposes to address this weakness through a proportionate approach in which third country CCPs would be classified depending on their systemic importance for the Union and the supervisory powers enjoyed by ESMA would depend on the systemic nature of the CCP concerned.
The possibility left by the proposal for the Commission to, acting upon a recommendation of ESMA and the central bank of issue, deny recognition to a third country CCP on the basis of the significance of the activities of that CCP for the Union, is a last resort tool that should remain in place as an insurance mechanism to protect the financial stability of the Union.
However, the process of denying recognition should be made more fact-based and evidence-based and offer more certainty to market actors. Therefore, the rapporteur proposes to mitigate the discretionary nature of the procedure for denying recognition to a third country CCPs through the requirement for ESMA and the central bank of issue to conduct a prior impact analysis and consider clear criteria.