Deal to make the EU an attractive clearing hub while addressing sectoral risks

Access to safe and efficient clearing solutions for banks and the real economy

More alternatives and safe clearing infrastructures in the EU

Supervision that is fit for purpose

On Wednesday, MEPs struck a deal with the Council to curb third country clearing risks and improve the competitiveness of the EU’s clearing services.

Negotiators from the Economic and Monetary Affairs (ECON) Committee reached a provisional agreement with the Belgian presidency of the Council of the EU. The deal addresses the financial stability risks caused by EU clearing members and clients being exposed to systemically important third-country central counterparties (CCPs). They also want to make clearing services and European CCPs more efficient and competitive.

CCPs sit between buyers and sellers of stocks, bonds or derivatives traded on one or more financial markets or commodity (spot) markets, including wholesale energy markets, as well as on one or more markets in crypto-assets, asset-referenced tokens or electronic money tokens and shoulder the risks of a transaction party default.

Adequate supervisory framework

The agreement aims to provide an adequate supervisory framework, with better information sharing, coordination and an enhanced role for the European Securities and Markets Authority (ESMA) in day-to-day supervision of EU CCPs. ESMA will be able to issue a reasoned opinion on an annual review and evaluation of CCPs, co-chair CCP colleges and have a coordinating role in emergencies. Annual onsite inspections of CCP by National Competent Authorities (NCAs) will be mandatory and ESMA will be able to participate in them.

Negotiators agreed on setting up a central database so information flows smoothly and directly from NCAs to ESMA.

Active account

Negotiators agreed that financial counterparties or non-financial counterparties that are subject to the clearing obligation should hold at least one active account at a CCP established in the EU and regularly clear through it at least five trades in each of the most relevant subcategories per class of derivative contract, defined by ESMA.

An account is considered active if it posts initial and daily variation margins, has in place the necessary IT connectivity, internal processes, legal documentation, stress tests, and can demonstrate its functioning would not be affected in the event of a significant and sudden increase in clearing activity.

Finally, the Commission secured a clear mandate to adopt further measures if necessary in several years to address EU reliance on third country CCPs.

Non-financial counterparties

The largest non-financial counterparties (NFCs), companies that are neither banks nor investment companies but, for example, companies active on energy markets, should be monitored effectively regarding intragroup transactions, as they might contribute to financial stability risks. MEPs made sure that for an NFC to be part of a group that benefits from the intragroup reporting exemption, its EU parent undertaking would report net aggregate positions of that NFC by class of derivatives to its competent authority. The competent authority would then share the information with ESMA.

Transparency

The clients of the EU CCPs, as well as recognised third-country CCPs, should be informed about an option to clear a derivative contract in an EU CCP, which should be transparent on fees, risks associated with the service provided and volumes of cleared transactions.

Quote

Danuta HÜBNER (EPP, PL), the lead MEP said: “Today’s agreement will significantly increase the competitiveness and attractiveness of our clearing framework. The changes we agreed will also enhance the competences of ESMA, giving the European supervisor a key role in overseeing EU CCPs. We are paving the way for a reduction in exposure towards third country CCPs, requiring counterparties to hold an active account at a European CCP and clear a determined number of trades through that account. We are also asking the Commission to take further measures in two years’ time, if necessary, following a thorough assessment by ESMA.”

Next steps

The deal needs to be formally adopted by Parliament and Council before it can come into force.