The European Commission is today proposing targeted reforms to further improve the financial stability of the European Union.
Central counterparties (CCPs) from the EU are already well regulated and equipped to deal with financial distress, thanks to a raft of measures adopted in the wake of the financial crisis. However, further reforms to ensure a more consistent and robust supervision of CCPs in EU and non-EU countries are now needed to deal with emerging challenges. CCPs have become a systemically-important part of the financial sector and their importance is growing. In addition, the foreseen withdrawal of the United Kingdom from the EU will have a significant impact on the regulation and supervision of clearing in Europe.
Valdis Dombrovskis, Vice-President responsible for Financial Stability, Financial Services and Capital Markets Union said: "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."
Jyrki Katainen, Vice-President responsible for Jobs, Growth, Investment and Competitiveness said: "The Commission has worked hard to make our financial system safer. This proposal is a first concrete step after the recent adoption of our Mid-Term Review for Capital Markets Union to strengthen the effectiveness of supervision and to accelerate market integration."
The EU adopted the European Market Infrastructure Regulation (EMIR) in 2012 following the financial crisis to better manage and monitor the risks arising from derivatives markets to ensure financial stability. Given that these reforms increase the importance of CCPs for the EU's financial stability, today's proposal is a timely overhaul of the supervisory arrangements for CCPs established by EMIR. It complements the proposed amendments to EMIR, as well as the Commission proposal for CCP recovery and resolution.
Today's proposal is based on an assessment of the supervisory arrangements for CCPs, as well as on feedback from a series of public consultations, notably on the operations of the European Supervisory Authorities (ESAs) and on the Capital Markets Union (CMU) Mid-Term Review.It also considers feedback received following the publication of the Commission's Communication responding to challenges for critical financial market infrastructures.
The proposal introduces a more pan-European approach to the supervision of EU CCPs, to ensure further supervisory convergence and accelerate certain procedures. The proposal also ensures closer cooperation between supervisory authorities and central banks responsible for EU currencies. To achieve this, a newly-created supervisory mechanism will be established within European Securities and Markets Authority (ESMA) ('CCP Executive Session') which will be responsible for ensuring a more coherent and consistent supervision of EU CCPs as well more robust supervision of CCPs in non-EU countries, or 'third countries'.
For non-EU CCPs, the proposal builds on the existing third-country provisions in EMIR and will make the process to recognise and supervise third-country CCPs more rigorous for those which are of key systemic importance for the EU. The aim is to address important challenges in derivatives clearing as its scale and importance grows and to take account of the role played by third-country CCPs in the clearing of financial instruments relevant to EU financial stability.
The proposal introduces a new "two tier" system for classifying third-country CCPs. Non-systemically important CCPs will continue to be able to operate under the existing EMIR equivalence framework. However, systemically important CCPs (so-called Tier 2 CCPs) will be subject to stricter requirements.
These requirements include:
- compliance with the necessary prudential requirements for EU-CCPs while taking into account third-country rules;
- confirmation from the relevant EU central banks that the CCP complies with any additional requirements set by those central banks (e.g. the availability or type of collateral held in a CCP, segregation requirements, liquidity arrangements, etc.);
- the agreement of a CCP to provide ESMA with all relevant information and to enable on-site inspections, as well as the necessary safeguards confirming that such arrangements are valid in the third country.
Depending on the significance of the third-country CCP's activities for the EU and Member States' financial stability, a limited number of CCPs may be of such systemic importance that the requirements are deemed insufficient to mitigate the potential risks. In such instances, the Commission, upon request by ESMA and in agreement with the relevant central bank can decide that a CCP will only be able to provide services in the Union if it establishes itself in the EU.
A derivative is a financial contract linked to the future value or status of the underlying to which it refers (e.g. the development of interest rates or of a currency value). Derivatives redistribute risk and can be used both to protect against legitimate risk and for speculative purposes. Most derivative contracts are not traded on an exchange but are instead privately negotiated between two counterparties (OTC).
As of end June 2016, the global outstanding notional value of OTC derivatives amounted to USD 544 trillion, corresponding to 89% of the overall derivatives market. Around 62% of the global value of all OTC derivatives contracts and asset classes (interest rates, credit default, foreign exchange, etc.) is centrally cleared by CCPs, which is equivalent to USD 337 trillion. About 97% (USD 328 trillion) of all centrally-cleared derivatives contracts were interest-rate derivatives.
EMIR implements the 2009 G20 commitment to increase the stability of the OTC derivatives market in the EU. The main objective of EMIR is to reduce systemic risk by increasing the transparency of the OTC derivatives market, by mitigating the counterparty credit risk and by reducing the operational risk associated with OTC derivatives. It includes several measures: that all standardised OTC derivatives contracts be cleared through central counterparties (CCPs) and that OTC derivatives contracts be reported to trade repositories (TRs).
There are currently 17 CCPs established in the EU, all of which are authorised under EMIR to offer their services within the jurisdiction - although not all CCPs are authorised to clear all asset classes. An additional 28 third-country CCPs have been recognised under EMIR's equivalence provisions, allowing them to offer their services in the EU.
The Commission has carried out an extensive assessment of EMIR to ensure that EU legislation is working effectively and efficiently. In addition to the 2015 public consultation on EMIR, this proposal relies on input received from stakeholders from the public consultations on the operations of the European Supervisory Authorities (ESAs) and on the Capital Markets Union (CMU) Mid-Term Review. It also considers feedback received following the publication of the Commission Communication responding to challenges for critical financial market infrastructures and further developing the CMU and the Staff Working Document (SWD) on EU equivalence decisions in financial services policy.
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