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The European Securities and Markets Authority (ESMA) conducted a comprehensive
assessment of systemically important Third-Country Central Counterparties (Tier 2 CCPs)
established in the United Kingdom (UK), and of the risks they may pose to the financial stability
of the European Union (EU) or one of its Member States. The CCPs concerned are LCH Ltd
and ICE Clear Europe Ltd.
The aim of the assessment was to determine the risks posed by a CCP to the financial stability
of the EU, or one of its Member States, even if that CCP was to comply fully with the conditions
for recognition as a Tier 2 CCP, as well as to consider the costs, benefits and consequences
of a potential decision not to recognise the CCP or some of its clearing services, as required
by Article 25(2c) of Regulation 648/2012 (EMIR).
Based on its assessment, ESMA concludes that it will not recommend to the European
Commission to derecognise a Tier 2 CCP, or one of its services, at this point in time. Instead,
ESMA is proposing that measures be considered by the relevant EU institutions and authorities
to mitigate risks related to the Tier 2 CCP clearing services that have been identified as being
of substantial systemic importance for the EU. The assessment was subject to a consultation
of the European Systemic Risk Board and the relevant Central Banks of Issue.
ESMA’s assessment was conducted in accordance with the Methodology for assessing a Third
Country CCP under Article 25(2c) of EMIR, which was published on ESMA’s website in July
2021.
ESMA identified several scenarios in which the two Tier 2 CCPs established in the UK may
potentially pose a financial stability risk to the EU or individual Member States, through the
provision of certain clearing services to EU entities and markets in certain EU currency
denominated products.
The assessment nonetheless identified important risks and vulnerabilities in connection with a
continued recognition of these clearing services, in particular, in times of distress, taking into
account the size of the exposures of EU clearing members and clients, interconnections
between the clearing services and the EU, and a lack of alternative clearing services.
All three clearing services have dominant market shares in one or more EU currency
denominated products, creating dependencies of EU market participants, including banks,
non-bank financial entities, and non-financial entities. Given the high credit and liquidity
exposures of EU clearing members, under certain scenarios this may create financial stability
risks for the EU, individual Member States, or EU currency areas.
Furthermore, insufficient supervisory powers, particularly in crisis events and including in the
context of a Tier 2 CCP recovery or resolution, may hamper EU authorities’ access to timely
information and the possibility to intervene effectively to manage financial stability risks for the
EU or individual Member States.
Therefore, ESMA is of the opinion that appropriate measures to reduce and mitigate such risks
should be considered by the relevant EU institutions and authorities. ESMA is also suggesting
a review of the effectiveness of these measures after an appropriate period of their
implementation.
Specifically, ESMA suggests the following steps be taken:
Consideration should be given to measures of regulatory and/or supervisory nature that would
incentivise EU clearing participants and EU clients to reduce their exposures towards Tier 2
CCPs and to rebalance these towards EU CCPs, with a view to reducing their substantial
systemic importance for the EU and so the identified risks. Measures to be considered by the
relevant EU institutions and authorities could include requirements for alternative clearing
arrangements for clearing members or clients, and appropriate prudential requirements to
effectively incentivise the participants to reduce their exposures to the Tier 2 CCPs. The
relevant EU authorities should also consider the implications that such regulatory and
supervisory incentives may have, including on the potential direction of the migration of
clearing services from Tier 2 CCPs to EU CCPs.
The framework for comparable compliance should be reviewed with a view to providing ESMA
with appropriate tools to fully assess ongoing compliance with EMIR. In particular, it should
provide ESMA with the flexibility to take the degree of systemic importance of the Tier 2 CCP
being assessed into account. It should also make explicit that the granting of comparable
compliance to a Tier 2 CCP does not limit or void ESMA’s supervisory and enforcement powers
over the Tier 2 CCP for the EMIR-requirements for which the Tier 2 CCP has been deemed
comparably compliant. Especially in the case of urgent need or where there would be vastly
different supervisory outcomes under the EU and third-country regimes, ESMA should still be
competent to take action.
ESMA’s powers should be reviewed and extended so that risks related to a crisis situation,
including in a recovery and resolution scenario, can be better mitigated. In particular, the
establishment of a clear and comprehensive toolbox for times of distress could bolster the
preparedness of CCPs and could be conceived in such a way to ensure a greater involvement
of ESMA to prepare for the potential recovery and resolution of a Tier 2 CCP and so, to deal
with the fallout of the declining health of such Tier 2 CCP in a better and more coordinated
way.
In particular, this should entail the following:
1. Appropriate tools should be introduced to address the cross-border systemic risks
during a crisis, including in a recovery and resolution situation, of Tier 2 CCPs accessed
by clearing participants established in the EU. At present, ESMA has no ex-ante powers
to mitigate such risks since neither EMIR nor the CCP Recovery and Resolution
Regulation (CCPRRR) include any specific ESMA role vis-à-vis Tier 2 CCPs.
2. The extent to which Tier 2 CCPs can be required to comply directly with all or part of
the provisions embedded in the CCPRRR should be examined, with gaps addressed
accordingly. Currently, a Tier 2 CCP must comply with Article 16, Title IV, and Title V
of EMIR to qualify to be recognised. However, there is no corresponding obligation in
respect of CCPRRR requirements.
3. ESMA should be granted with an approval power in respect of the recovery plans for
Tier 2 CCPs, in order to evaluate whether there is a need to limit potential negative
impacts on EU market participants and EU financial stability.
4. ESMA should be consulted by relevant third country authorities before the validation of
the resolution plan of a Tier 2 CCP. Moreover, in the case of the resolution of a Tier 2
CCP, ESMA should be consulted before any discretionary measures are taken that
could potentially have adverse impacts on an EU market participant and, potentially,
on EU financial stability (such as a decision to terminate access of an EU bank to a
third country CCP that is under resolution).
5. ESMA should be granted the power to request to be consulted by Tier 2 CCPs and
third country resolution authorities prior to their imposing any restriction, suspension,
or termination of access to EU clearing members. This would supplement the above
proposed consultation powers for recovery and resolution events.
Finally, a new mandate should be included in the CCPRRR to provide ESMA with the
possibility to negotiate a recovery and resolution specific MoU with the relevant authorities on
Tier 2 CCPs.