Brussels
13 June 2017
Reporter: Mark Dugdale
EC proposes ‘two-tier’ approach to CCP regulation
EU legislators have proposed a massive overhaul of central counterparty supervision.

The European Commission’s proposal for more robust supervision of CCPs was issued today, in response to a lack of regulatory consistency, their increasing importance in financial services, and the expectation that the UK’s withdrawal from the EU will have a significant impact on the regulation and supervision of clearing in Europe.

Under the proposal, a new supervisory mechanism will be established within the European Securities and Markets Authority (ESMA), which will be responsible for ensuring a more coherent and consistent supervision of CCPs based in the EU, as well more robust supervision of CCPs in non-EU countries, or 'third countries'.

Non-EU CCPs appear to be the real targets of this proposal, with the introduction of a new two-tier system designed to apply stricter requirements to systemically important—or so-called second-tier—CCPs.

These requirements include compliance with the necessary prudential requirements for EU CCPs while taking into account third-country rules, as well as confirmation from EU central banks that the CCP complies with any additional requirements they set forward, such as collateral management, asset segregation and liquidity arrangements.

ESMA also envisages second-tier CCPs agreeing to provide ESMA with all relevant information and to enable on-site inspections, as well as the necessary safeguards confirming that these arrangements are valid in the third country.

In the event that a third-country CCP is deemed to be of “such systemic importance that the requirements are deemed insufficient to mitigate the potential risks”, the European Commission will have the power to say that the CCP can only provide services in the union if it establishes itself in the EU.

Non-systemically important CCPs will continue to be able to operate under the existing European Market Infrastructure Regulation equivalence framework.

Monica Gogna, financial regulation partner at law firm Ropes & Gray, said: “This ‘two-tier’ approach seems to be shifting the balance of power further into the hands of the EU and ESMA.”

“What is interesting is that, as with many other initiatives recently produced by ESMA, the effect is far-reaching to jurisdictions other than the UK. It is clear that the deluge of regulation from the EU shall continue in this space.”

Valdis Dombrovskis, vice president responsible for financial stability, financial services and the capital markets union at the European Commission, commented: “The continued safety and stability of our financial system remains a key priority. As we face the departure of the largest EU financial centre, we need to make certain adjustments to our rules to ensure that our efforts remain on track.”

The European Commission proposal follows hot on the heels of its communication issued on 4 May, which which suggested that further safeguarding of the financial system is required following Brexit, and that this could include increased supervision of euro clearing and forced relocation.

In the communication, the European Commission said: “In view of the challenges in the area of derivatives clearing, further changes will be necessary to improve the current framework that ensures financial stability and supports the further development and deepening of the capital markets union.”

The Futures Industry Association responded to that communication, with president Walt Lukken suggesting that forced relocation of euro-denominated cleared derivatives would be “the most disruptive and expensive approach to overseeing third-country CCPs, without improving the oversight of this activity”.

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