Explanatory Memorandum to COM(2017)331 - Amending the regulation establishing ESMA and regulation (EU) 648/2012 as regards procedures for the authorisation of CCPs and requirements for recognition of 3rd-country CCPs

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dossier COM(2017)331 - Amending the regulation establishing ESMA and regulation (EU) 648/2012 as regards procedures for the authorisation of CCPs ...
source COM(2017)331 EN
date 13-06-2017


1. CONTEXT OF THE PROPOSAL

1.1.Reasons for and objectives of the proposal

Derivatives contracts are a key tool for Europe's banks and businesses to manage their risks, whether they are related to changes in interest rates, currency fluctuations or the default of a business counterpart. However, opaque derivatives markets also acted as an unwelcome contagion channel. Derivatives markets must therefore be regulated and supervised effectively to safeguard financial stability.

Given the global nature of derivatives markets and in accordance with the 2009 G20 Pittsburgh agreement 1 to reduce the systemic risk linked to extensive use of derivatives, the EU adopted the European Market Infrastructure Regulation (EMIR) in 2012. 2 As a key pillar of EMIR standardised over-the-counter (OTC) derivatives contracts must be cleared through a Central Counterparty (CCP). A CCP is a market infrastructure that reduces systemic risk and enhances financial stability by standing between the two counterparties to a derivatives contract (i.e. acting as buyer to the seller and seller to the buyer of risk) and thereby reducing the risk for both. EMIR also introduced strict prudential, organisational and business conduct requirements for CCPs and established arrangements for their prudential supervision to minimise any risk to users of a CCP and underpin systemic stability.

Since 2012 when EMIR was adopted, central clearing has been significantly expanding and CCPs have become increasingly concentrated and integrated across the EU and with third countries.

The present proposal ensures that supervisory arrangements keep pace with these developments. It is proposed that the EU equips its Capital Markets Union with a more effective and consistent supervisory system for CCPs, in the interest of further market integration, financial stability and a level-playing field.

Contents

1.

CCPs have grown in importance since the adoption of EMIR and will expand further in the coming years


In the five years since the adoption of EMIR, the volume of CCP activity – in the EU and globally - has grown rapidly both in scale and in scope. This is a sign that the legislation works and is fulfilling its purpose.

As of end of June 2016, around 62% of the global value of all OTC derivatives contracts and asset classes (interest rates, credit default, foreign exchange, etc.) were centrally cleared by CCPs 3 , which is equivalent to $337 trillion. About 97% ($328 trillion) of all centrally-cleared derivatives contracts are interest-rate derivatives.

At the end of 2015, about 60% of all OTC interest-rate derivatives were centrally cleared, while the corresponding figure by the end of 2009 was 36% 4 . Central clearing has similarly gained in importance in the credit derivatives (so-called CDS) market, with the proportion of outstanding CDSs cleared through CCPs increasing steadily since these data were first reported, i.e. 37% at the end of June 2016 while the corresponding figure was 10% at the end of June 2010 5 .

The rapidly expanding role of CCPs in the global financial system not only reflects the introduction of central clearing obligations across different asset classes 6 , but also increased voluntary use of central clearing amid growing awareness of the benefits of central clearing among market participants (clearing obligations have applied only since June 2016) 7 . EMIR requires certain interest-rate derivatives and CDSs to be centrally cleared in line with similar requirements in other G20 countries 8 . Bank capital rules have been changed to incentivise central clearing and make bilateral clearing a costlier option in relative terms 9 , while bilateral transactions are subject to additional collateral requirements since March 2017 10 .

The expansion in CCP activity is set to continue in the coming years. Mandatory clearing obligations are likely for additional asset classes 11 and the incentives to mitigate risks and costs are likely to lead to even more voluntary clearing. The May 2017 proposal to amend EMIR in a targeted manner, to improve its effectiveness and proportionality, will reinforce this trend, by creating further incentives for CCPs to offer central clearing of derivatives to counterparties. 12 Finally, deeper and more integrated capital markets as a result of the Capital Markets Union (CMU) will further increase the need for cross-border clearing in the EU, thus increasing the importance and the interconnectedness of CCPs within the financial system.

2.

Expanding role of CCPs raises concerns about the need to upgrade supervisory arrangements under EMIR, also in light of the establishment of the Capital Markets Union


The growing importance of CCPs in the financial system and the associated concentration of credit risk in these infrastructures have drawn the attention of governments, regulators, supervisors, central banks and market participants.

While the scale and scope of centrally-cleared transactions has expanded, the number of CCPs has remained relatively limited. There are currently 17 CCPs established in the EU, all of which are authorised under EMIR to offer their services within the Union - although not all CCPs are authorised to clear all asset classes (e.g. only 2 CCPs clear credit derivatives, only 2 CCPs clear inflation derivatives 13 ). 14 An additional 28 third-country CCPs have been recognised under EMIR's equivalence provisions, allowing them to offer their services in the EU. 15 Accordingly, clearing markets are integrated across the EU and are highly concentrated in certain asset classes. They are also highly interconnected. 16

While increased clearing via properly regulated and supervised CCPs reinforces systemic stability overall, the concentration of risk makes the failure of a CCP a low-probability but potentially extremely high-impact event. Given the centrality of CCPs to the financial system, the increasing systemic importance of CCPs gives rise to concerns. CCPs have themselves become a source of macro-prudential risk, as their failure could cause significant disruption to the financial system and would have systemic effects. For instance, large scale, uncontrolled termination and close-out of contracts cleared by CCPs could lead to liquidity and collateral strains across the market, causing instability in the underlying asset market and the wider financial system. Like some other financial intermediaries, CCPs are also potentially susceptible to “runs” due to clearing members losing confidence in the solvency of a CCP. This could create a liquidity shock for the CCP as it attempts to meet its obligations to return the principal collateral (i.e. initial margin). The impact of a CCP failure due to increased concentration of risk would be amplified by a growing interconnectedness between CCPs both directly and indirectly via their members (usually large global banks) and clients.

In response, and in line with the G20 consensus 17 , the Commission adopted a proposal for a Regulation on CCP Recovery and Resolution in November 2016 18 . The objective of the proposal is to ensure that authorities are appropriately prepared to address a failing CCP, safeguarding financial stability and limiting taxpayer costs. The CCP Recovery and Resolution proposal refocused attention on the supervisory arrangements for EU and third-country CCPs included in EMIR and the extent to which these arrangements can be made more effective five years after adoption of EMIR. This proposal is currently under negotiations in the European Parliament and the Council. That ongoing work-stream needs to be coordinated and consistent with the current proposal.

3.

Supervisory arrangements for EU CCPs


Under EMIR, EU CCPs are supervised by colleges of national supervisors, the European Securities and Markets Authority (ESMA), relevant members of the European System of Central Banks (ESCB), and other relevant authorities (e.g. supervisors of the largest clearing members, supervisors of certain trading venues and central securities depositories). These colleges can include as many as 20 member authorities and they rely on coordination by the home-country authority. These arrangements raise certain concerns in light of the current state of integration in the market that needs to be reflected in the supervisory arrangements. This is also important in order to advance the Capital Markets Union.

First, the growing concentration of clearing services in a limited number of CCPs, and the consequential increase in cross-border activity, implies that CCPs in a small number of individual Member States are increasingly relevant for the EU financial system as a whole. Against this trend, the current supervisory arrangements relying mainly on the home-country authority (e.g. the home-country authority is ultimately responsible for important decisions such as the extension of the authorisation or the approval of outsourcing and interoperability arrangements) need to be reconsidered.

Second, diverging supervisory practices for CCPs (e.g. different conditions for authorisation or model validation processes) across the EU can create risks of regulatory and supervisory arbitrage for CCPs and indirectly for their clearing members or clients. The Commission has drawn attention to these emerging risks and the need for more supervisory convergence in its Communication on CMU of September 2016 19 and in the public consultation on the operations of the European Supervisory Authorities (ESAs) 20 , both of which highlighted the challenges posed by heterogeneous supervisory practices.

Third, the role of central banks - as issuers of currency - is not adequately reflected in CCP colleges. While the mandates of central banks and supervisors may overlap (in particular in areas such as interoperability, liquidity-risk controls etc.), there is a potential for misalignment when supervisory actions impact on key responsibilities of central banks in areas such as price stability, monetary policy and the payment systems. In crisis situations, their misalignments can amplify the risks to financial stability if the assignment of responsibilities between authorities remains unclear.

4.

Supervisory arrangements for third-country CCPs


Today, a significant amount of financial instruments denominated in the currencies of the Member States are cleared by recognised third-country CCPs. For example, the notional amount outstanding at Chicago Mercantile Exchange (CME) in the US is EUR 1.8 trillion for euro-denominated interest-rate derivatives, and SEK 348 billion for SEK denominated interest-rate derivatives. This also raises a series of concerns.

First, the implementation of EMIR’s system of equivalence and recognition has shown certain shortcomings in particular regarding ongoing supervision. In particular, after a third-country CCP has been recognised, ESMA has encountered difficulties in accessing information from the CCP, in conducting on-site inspections of the CCP and in sharing information with the relevant EU regulators, supervisors and central banks. As a result, there is a risk that third-country CCP practices and/or adjustments to risk management models go undetected and/or unaddressed, which may have important financial-stability implications for the EU entities.

Second, the potential for misalignments between supervisory and central-bank objectives within colleges acquires an additional dimension in the context of third-country CCPs where non-EU authorities are involved.

Third, there is a risk that changes to the CCP rules and/or regulatory framework in a third-country could negatively affect regulatory or supervisory outcomes, leading to an un-level playing field between EU and third-country CCPs and creating scope for regulatory or supervisory arbitrage. There is currently no mechanism to ensure that the EU is informed automatically of such changes and can take appropriate measures.

Such concerns are likely to become more significant in the coming years because the global nature of capital markets means that the role played by third-country CCPs is set to expand. In addition to the 28 third-country CCPs already recognised by ESMA, a further 12 CCPs from 10 jurisdictions have applied for recognition 21 and are awaiting a decision of the Commission for the equivalence of their regulatory and supervisory regimes.

Moreover, a substantial volume of euro-denominated derivatives transactions (and other transactions subject to the EU clearing obligation) is currently cleared in CCPs located in the United Kingdom. When the United Kingdom exits the EU, there will therefore be a distinct shift in the proportion of such transactions being cleared in CCPs outside the EU's jurisdiction, exacerbating the concerns outlined above. This implies significant challenges for safeguarding financial stability in the EU that need to be addressed.

In light of these considerations, the Commission adopted a Communication on 4 May 2017 on responding to challenges for critical financial market infrastructures and further developing the Capital Markets Union 22 . The Communication indicated that "further changes [to EMIR] will be necessary to improve the current framework that ensures financial stability and supports the further development and deepening of the Capital Markets Union (CMU)".

5.

Need to improve current supervisory arrangements


As the EU clearing landscape continues to evolve, the arrangements for crisis prevention and management of CCPs must be as effective as possible. EMIR and the Commission proposal for a Regulation on CCP Recovery and Resolution are important steps in this regard. However, five years after the adoption of EMIR, the growing size, complexity and cross-border dimension of clearing in the EU and globally have highlighted shortcomings in the supervisory arrangements for EU and third-country CCPs. The present proposal therefore sets out specific amendments to EMIR and the ESMA Regulation 23 , in particular to establish clear and coherent supervisory arrangements both for EU and third-country CCPs.

The impact assessment report accompanying this proposal considers the costs and benefits of these amendments. It sets out a number of options in order to enhance supervision of CCPs at EU level, involve further the central banks of issue in the supervision of CCPs, and strengthen the ability of the EU to monitor, identify and mitigate third-country CCP risks.

The impact assessment provides comprehensive evidence that the proposed amendments contribute effectively to reinforce the overall stability of the EU financial system and to lower further the already low probability (but extremely high-impact) risk of a CCP failure, while keeping costs at a minimum for market participants. The proposed amendments also contribute to the further development and deepening of the CMU, in line with the political priorities of the Commission.

1.2.Consistency with existing policy provisions in the policy area

This proposal is related to, and consistent with, a number of other EU policies and ongoing initiatives that aim to: (i) address the systemic importance of CCPs; (ii) promote the use of central clearing, and (iii) enhance the efficiency and effectiveness of EU-level supervision, both within and outside the EU.

First, this proposal is consistent the Commission's proposal 24 for a Regulation on CCP Recovery and Resolution adopted in November 2016. That proposal seeks to ensure that EU and national authorities are appropriately prepared to address a failing CCP, maintain financial stability and avoid that costs associated with the restructuring and the resolution of failing CCPs fall on taxpayers. The Commission's proposal aims to ensure that, in the unlikely scenario where CCPs face severe distress or failure, the critical functions of CCPs are preserved while maintaining financial stability and helping to avoid that costs associated with the restructuring and the resolution of failing CCPs fall on taxpayers. The crisis-management arrangements for recovery and resolution of CCPs included in that proposal are based on the existence of the highest quality arrangements for crisis prevention (i.e. for CCP regulation and supervision) under EMIR. By further enhancing the supervision of CCPs under EMIR, the likelihood, however small, of needing to resort to recovery and resolution measures should be further diminished. The adjustments and enhancements of supervision brought by this proposal will also need to be appropriately reflected in the pending legislative proposal on CCP Recovery and Resolution. Targeted modifications may be necessary to take into account the new role of the CCP Executive Session in colleges under EMIR and subsequently in the resolution colleges.

Second, this proposal is related to the Commission's proposal 25 for an amendment to the Capital Requirements Regulation (CRR) 26 adopted in November 2016. The proposal seeks to exclude from the calculation of the leverage ratio thresholds the initial margins for centrally-cleared derivative transactions received by clearing members in cash from their clients that are passed on to CCPs. It will, therefore, ease access to clearing – as the capital requirements to offer client or indirect clearing services will diminish – again reinforcing the importance of CCPs within the financial system.

Third, this proposal complements the Commission's proposal for targeted amendments to EMIR 27 , adopted in May 2017. The proposal seeks to simplify certain EMIR requirements and make them more proportionate in order to reduce excessive costs for market participants, without compromising financial stability. This proposal should therefore provide further incentives for market participants to use central clearing – again reinforcing the importance of CCPs within the financial system.

Fourth, this proposal is consistent with the March 2017 consultation launched by the Commission on the operations of the European Supervisory Authorities (ESAs) 28 , with a view to strengthening and improving the effectiveness and efficiency of the ESAs.

Fifth, it is consistent with experiences with the implementation and enforcement of third-country provisions in EU financial legislation, as set out in its Staff Working Document on equivalence 29 . The Staff Working Document provides a factual overview of the equivalence process with third countries in EU financial services legislation. It sets out the experience with the implementation and enforcement of third-country provisions in EU financial legislation. It also presents the key aspects of equivalence (e.g. exercise of empowerments, assessment, ex-post monitoring) and provides more clarity on how these tasks are approached in practice.

Sixth, this proposal is consistent with work ongoing at an international level in the framework of the Financial Stability Board (FSB) aiming to, among others: (i) promote the use of central clearing and cross-border arrangements between jurisdictions to enhance the stability of the OTC derivatives market; (ii) achieve a consistent application of the Principles for Financial Markets Infrastructure (PFMIs) developed by the Committee on Payments and Markets Infrastructure (CPMI) and the International Organisation of Securities Commissions (IOSCO); (iii) monitor the implementation of the G20 derivatives markets reforms (through the FSB OTC Derivatives Working Group); and (iv) develop further guidelines on CCPs resolution (FSB Resolution Group).

1.3.Consistency with other Union policies

This proposal also relates to, and is consistent with, the Commission's ongoing efforts to further develop the CMU. The need to develop and integrate further EU capital markets was stressed in the Communication on the CMU of September 2016. 30 Further supervisory convergence of CCPs at EU level can support the development of deeper and better integrated capital markets, as more efficient and resilient CCPs are essential elements for the well-functioning of CMU. In order to do so, the Communication on the mid-term review of the CMU 31 , which the Commission adopted on 8 June 2017, calls for strengthening the powers of ESMA to promote the effectiveness of consistent supervision across the EU and beyond. Conversely, as a result, the emergence of larger and more liquid financial markets implied by the CMU will result in even more transactions being cleared via CCPs, and increase their systemic relevance. Given the potential for increased volumes as well as the current opportunities for regulatory and supervisory arbitrage, further enhancements of the supervisory framework are required in order to ensure a strong and stable CMU.

In addition, the proposal is consistent with the Commission's Reflection paper on the deepening of the Economic and Monetary Union, adopted on 31 May 2017 32 . In particular, the reflection paper outlines that the completion of a genuine financial Union is essential for an effective and stable Economic and Monetary Union. According to the paper, this includes moving ahead with elements that are already on the table, including by delivering on the CMU. The proposal will help support the development of deeper integrated capital markets by ensuring further supervisory convergence of CCPs at EU level.

By tackling emerging threats to the smooth functioning of the financial system, the proposal also ensures that financial markets can continue to play their role in contributing to sustainable, long-term growth to further deepen the internal market in the interests of consumers and businesses, as part of the Commission's efforts to support Investments, Growth and Jobs.

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

2.1.Legal basis

The legal basis for this proposal is Article 114 TFEU, which is the legal basis for EMIR and the ESMA Regulation. The analysis carried out as part of the impact assessment report identifies the elements of EMIR that need to be amended to reinforce the overall stability of the EU financial system and to lower further the already low probability (but extremely high-impact) risk of a CCP failure, while keeping costs at a minimum for market participants. Only the co-legislators have the competence to make the necessary amendments. Changes to the ESMA Regulation are necessary to create the CCP Executive Session which is entrusted with important tasks under EMIR.

2.2.Subsidiarity (for non-exclusive competence)

EMIR is a regulation that is binding in its entirety and directly applicable in all Member States. EMIR sets out the supervisory framework applying both to CCPs established in the EU and to third-country CCPs that provide clearing services to clearing members or trading venues established in the EU. Under EMIR, the Member State of establishment of the CCP plays a major role in the supervisory arrangements. However, Member States and national supervisors unilaterally cannot solve the systemic risks posed by highly integrated and interconnected CCPs, which operate on a cross-border basis beyond the scope of national jurisdictions. In addition, Member States cannot mitigate on their own risks arising from diverging national supervisory practices. Member States and national authorities cannot address on their own the systemic risks that third-country CCPs can pose to the financial stability of the EU as a whole.

The objectives of EMIR to increase the safety and efficiency of CCPs by laying down uniform requirements for the performance their activities cannot be sufficiently achieved by the Member States individually and can therefore, by reason of the scale of actions, be better achieved at EU level in accordance with the principle of subsidiarity as set out in Article 5 of the TFEU.

2.3.Proportionality

The proposal aims to ensure that the supervisory arrangements of EMIR meet the objective of reducing systemic risk in derivatives markets in a more proportionate and effective manner, at a minimum cost for market participants. The proposal sets out a streamlined framework for the supervision of CCPs authorised at EU level, with clarified roles and responsibilities for all the various national and EU authorities and institutions involved. By recalibrating the supervisory arrangements, the proposal contributes to addressing the increasing cross-border systemic nature of CCPs, while preserving the fiscal responsibilities of the authorities of the Member State of establishment. In addition, the proposal introduces an approach permitting third-country CCPs to comply with EMIR's requirements by complying with their own national comparable rules which allows for a proportionate approach focused on the systemic relevance of third-country CCPs for EU markets. At the same time, the proposal does not go beyond what is necessary to achieve the EMIR objective of reducing systemic risk, through the establishment of transparent and objective criteria to identify, monitor and mitigate third-country CCP risks to the EU's financial stability. The proposal therefore contributes directly to making the supervisory arrangements of EMIR more proportionate overall. Likewise, the proposal introduces only targeted amendments to the ESMA Regulation, that do not go beyond what is necessary to enable ESMA to carry out the tasks enshrined in EMIR.

2.4.Choice of the instrument

EMIR and the legal act establishing ESMA are both Regulations and therefore need to be amended by a legal instrument of the same nature.

3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

3.1.Ex-post evaluations/fitness checks of existing legislation

The impact assessment report accompanying this proposal provides an analysis of the extent to which the existing EMIR supervisory arrangements for CCPs established inside and outside the EU have met their objective of ensuring a level-playing field for the provision of CCP services in an effective and efficient way, while at the same time being coherent, relevant and providing EU added-value. The analysis also reflects the outcome of two peer reviews on the functioning of the supervisory colleges under EMIR conducted by ESMA in 2015 33 and 2016 34 . In addition, the analysis builds on input by ESMA assessing the current EMIR third-country equivalence and recognition regime as part of a report prepared for the Commission in the context of the review of EMIR 35 .

Regarding the effectiveness of the EMIR supervisory arrangements applicable to CCPs established in the EU, practical experience shows that the cooperation between members of the colleges in their current structure has allowed the views of supervisors of different actors involved in central clearing to be represented, thereby contributing to the objectives of supervisory convergence and a level playing field amongst CCPs established in the EU. However, there are concerns about the consistency of CCP supervision across Member States, suggesting room for a more effective approach to cross-border CCP supervision. In particular the degree of cooperation between members of the colleges varies significantly depending on the role of the college in the decision-making process. While during the authorisation process, "ESMA observed that in general the CCP colleges facilitated two-way cooperation: on the one hand, the chairing national competent authorities (NCAs) received good and constructive input from the college members which fed into their risk assessments; while on the other hand, college members received the information they required in order to vote on the adoption of the joint opinion." 36 , a reduced level of cooperation occurs where there is no need for such an opinion. Thus, ESMA sees a 'risk that following authorisation CCP colleges may become simply a mechanism for the exchange of information, rather than an effective supervisory tool.' In addition, preliminary observations suggest that: (i) different college members participate to different degrees in college discussions; and (ii) the supervisory approaches of NCAs vary to a significant extent even in cases involving comparable CCPs. Common templates provided by ESMA to support supervisory convergence between NCAs have failed to solve that problem, because NCAs exercise their discretion differently. There is therefore room for improvement to help strengthen the consistency of CCP supervision at EU level, improve the level playing field in the EU and achieve more effective supervisory convergence.

On the effectiveness of supervision of third-country CCPs, the current arrangements have allowed ESMA to recognise 28 third-country CCPs to provide clearing services to EU counterparties. This is in line with the G20's objectives to promote cross-border arrangements. At the same time, most respondents to the EMIR consultation (mainly companies from the financial sector and industry associations) considered that the EMIR equivalence regime for third-country CCPs has de facto created a situation where the requirements for CCPs established in the EU are possibly stricter than for third-country CCPs, leading to an un-level playing field which is detrimental to the former. ESMA also highlighted that the EMIR approach vis-à-vis third-country CCPs is extremely flexible, with full reliance on third-country rules and supervisory arrangements, while the majority of third-country jurisdictions consider third-country CCPs as systemically relevant infrastructures and apply them to closer scrutiny. ESMA argued that, although the current EMIR approach could be a model in terms of mutual reliance, if the EU remains the only jurisdiction relying extensively on third-country rules and authorities, this might put it at risk and does not benefit CCPs established in the EU.

Regarding efficiency, a majority of respondents to the EMIR consultation supported the objective of ensuring a level playing field between CCPs established in the EU by promoting a homogeneous application of EMIR. At the same time, they pointed to the length of the approval processes, underlining that, in certain cases, the timeline for approval could be postponed indefinitely by the NCA, giving rise to legal uncertainty. Certain respondents also pointed to the need for greater transparency in the functioning of colleges, not only for CCPs for the authorisation and extension of services processes but also for users of CCPs in order to allow them to get more visibility of the authorisation process and its consequences. Moreover, several authorities and industry participants, and market infrastructure operators asked for more clarity in the process and timeframe for the authorisation and extension of services provided by CCPs. Respondents suggested that EMIR should clarify the modalities for the college process, in particular the roles and responsibilities of different college members. There is therefore room for improvement, in particular for a more streamlined supervision of CCPs established in the EU. This could contribute to a more efficient collaboration between national and EU supervisors, thereby avoiding the duplication of supervisory tasks and reducing the corresponding allocation of time and resources.

Regarding the current supervisory regime for third-country CCPs, industry associations that responded to the EMIR consultation indicated that the Commission takes too long to complete its equivalence assessments. ESMA also raised a series of concerns about the efficiency of the process of recognition of third-country CCPs. First, it argued that the process is rigid and burdensome, as demonstrated by the limited number of recognition decisions taken in 2015. Second, it pointed out that the recognition of third-country CCPs imposes a significant administrative burden on ESMA.

Regarding relevance, the supervisory arrangements of EMIR remain integral to international efforts to increase the stability of the global OTC derivatives market, while facilitating cross-border deference arrangements between jurisdictions. EMIR's supervisory arrangements also ensure that financial markets continue to play their role in contributing to sustainable, long-term growth to further deepen the internal market in the interests of consumers and businesses, as part of the Commission's efforts to support investments, growth and jobs.

As described in Section 2.4 of the impact assessment report accompanying this proposal, the supervisory arrangements of EMIR are coherent with other pieces of EU legislation that aim to: (i) address the systemic importance of CCPs; (ii) promote further the use of central clearing, and (iii) enhance the efficiency and effectiveness of EU-level supervision, both within and outside the EU.

Finally, in terms of the EU added value, the supervisory arrangements of EMIR covered a gap by introducing a new mechanism facilitating supervisory convergence at EU level in order to address the systemic risks of CCPs offering clearing services to EU counterparties.

3.2.Stakeholder consultations

This proposal builds on several public consultations.

First, it takes into account views from stakeholders and public authorities following the publication of the Commission's Communication on responding to challenges for critical financial market infrastructures and further developing the CMU of 4 May 2017 37 . The Communication considered that, in view of the challenges in the area of derivatives clearing, further changes would be necessary to ensure financial stability and the safety and soundness of CCPs that are of systemic relevance for financial markets across the EU and to support the further development of the CMU.

Second, the proposal relies on comments specific to EMIR and CCP supervision as part of the consultation on the operations of the ESAs that was open from 21 March to 17 May 2017. The consultation sought to build a clearer overview of areas where the effectiveness and efficiency of the ESAs can be strengthened and improved 38 .

Third, the proposal considers comments focused on supervisory convergence as part of the consultation on the CMU mid-term review, which was open from 20 January 2017 to 17 March 2017 39 . The consultation sought the views of stakeholders on how the current CMU programme can be updated and completed so that it represents a strong policy framework for the development of capital markets. The consultation generated 178 responses.

Fourth, the proposal takes into account contributions specific to EMIR's supervisory arrangements as part of the EMIR review consultation that was open between May and August 2015. The consultation generated more than 170 contributions from a broad range of stakeholders and public authorities 40 .

Generally, respondents indicated that EMIR's current supervisory arrangements help increase the safety and soundness of CCPs established in the EU, with general support for the role performed by colleges of supervisors. Respondents also highlighted that most of the requirements of EMIR have started to apply only recently, and that it would therefore be premature to consider a complete overhaul of the existing supervisory architecture. Respondents, and in particular public authorities, underlined that, given the various types of CCPs currently operating (local vs. cross-border), national competent authorities should still be actively involved in supervision. However, many respondents also underlined that the operations of CCPs are of cross-border systemic relevance, highlighting the need to avoid supervision being conducted only at national level. The majority of respondents expressed support for increased supervisory convergence at EU level over the supervision of CCPs, indicating that the current regime is fragmented and inefficient. Increased cross-border activity, systemic importance of CCPs and access to liquidity in the Euro area were cited by respondents as factors why supervisory powers at EU level should be extended. Nevertheless, when considering any extension of direct supervisory powers at EU level over EU and third-country CCPs, respondents warned that such an extension should be in line with the principles of subsidiarity and proportionality, particularly as no EU structure would have sufficient resources to cater for a failing CCP, no matter how limited the risk of such an event is. Finally, a number of respondents, including ESMA 41 , underlined the need to improve the current framework as regards third-country CCPs.

3.3.Impact assessment

The Commission conducted an impact assessment of relevant policy alternatives. Policy options were assessed against the key objectives of safeguarding the safety and efficiency of CCPs that are of systemic relevance to EU markets and enhancing financial stability in the EU, without undue fragmentation of the global system.

The Impact Assessment (IA) report was approved by the Regulatory Scrutiny Board (RSB) on 2 June 2017. It was submitted to the RSB on 22 May, and the RSB made a number of recommendations for improvements via a written procedure. Thus, the IA was resubmitted on 30 May to the RSB. The changes introduced in the IA to take into consideration the recommendations by the RSB were the following:

1. Specific systemic risks linked to the United Kingdom's withdrawal from the EU: Further description of the changes relating to the withdrawal of the United Kingdom from the EU in the section on the baseline scenario as part of the chapter on policy options.

2. Preferred policy option for mitigation of third-country CCP risks: More detailed description of how option 3 relating to supervision based on criteria or thresholds would work in practice for third-country CCPs, depending on the risks that they would pose to the EU.

3. Impact of the preferred policy options on systemic risks: More detailed description of the role of CBIs regarding EU and non-EU CCPs. Clarification that the trade-off between supervisory burden and financial stability would be proportionate to the EU's exposure to third-country CCP risks. Explanation that a targeted location policy would reduce costs to a minimum.

4. Other issues: (i) clarification of how the decision-making process in the Executive Session would work compared to that of the current colleges; (ii) definition of operational objectives in the chapter on monitoring and evaluation; and (iii) further explanation of why there is no formal evaluation of EU CCPs as an Annex to the impact assessment report.

The options considered in the IA concern targeted amendments of the supervisory arrangements of EMIR applying both to CCPs established in the EU and to third-country CCPs offering or willing to offer their services to EU counterparties. To achieve the desired objectives, a number of preferred policy options were identified:

·In order to enhance the supervision of CCPs established in the EU, the current supervisory arrangements should be streamlined and further centralised through the establishment of a European supervisory mechanism, ensuring the proper involvement of national authorities, central banks of issue and ESMA within the scope of their responsibilities. This will help improve the coherence of supervisory arrangements for CCPs established in the EU, by promoting a level playing field amongst the European CCPs as well as homogeneity in the application of EMIR across the EU, while ensuring that specific areas of supervisory responsibility and related national fiscal responsibility remain adequately aligned. This will contribute to lower costs both at an institutional level, by avoiding supervisory overlaps between authorities, and for CCPs, by simplifying their supervisory framework simplified and by limiting the risk of supervisory duplication.

·In order to enhance supervisory arrangements within the EU designed to mitigate the risks related to third-country CCPs, the impact assessment report considers that third-country CCPs could be subject to a ‘sliding scale’ of additional supervisory requirements by ESMA and relevant CBIs based on objective criteria or thresholds. The degree and intensity of EU supervision would be proportionate and depend on the risks posed by third-country CCPs to the EU. Different criteria or thresholds could be set: low-impact CCPs (Tier 1 CCPs) would be subject to essentially a continued implementation of the EMIR equivalence and recognition regime, while medium to high-impact CCPs (Tier 2 CCPs) would be subject to a sliding scale of additional supervisory requirements, including at the end of the spectrum an EU authorisation and establishment requirement for any third-country CCPs that would pose substantial exposure risk to the EU and the stability of its financial system.

·This gradual sliding scale of supervisory requirements will allow for a proportionate and balanced supervision of third-country CCPs and adequate mitigation of any associated systemic risk, without undue fragmentation of the global system and excessive costs for market participants. This will help enhance the mechanisms for EU supervisors and CBIs to address third-country CCP risks while ensuring a level-playing field between CCPs established in the EU and third-country CCPs and providing for better ongoing enforcement and compliance of third-country CCPs. While this option may trigger certain additional costs at institutional level and for third-country CCPs, and ultimately for market participants, such costs have to be weighed against the gains in systemic risk mitigation, although the exact monetary benefits of a reduction of systemic risk are difficult to quantify in advance.

The package of proposed options aims to establish clear and coherent supervisory arrangements for CCPs established in the EU and in third countries.

The impact assessment report also considers the overall costs and benefits of the preferred options, with a view to assessing compliance costs and the burden imposed on market participants. The next section presents the expected impact of the proposed measures.

3.4.Regulatory fitness and simplification

While EMIR pursues the general objective of reducing the systemic risk by increasing the safety and efficiency of CCPs, the present initiative aims to render the supervision of CCPs more effective and efficient and, by following a proportionate approach based on a thorough risk assessment, to reduce the regulatory and compliance burden for market participants. This is in line with the Commission's Better Regulation Agenda.

This initiative will strengthen supervisory arrangements for CCPs established in the EU (responding to their growing size, integration, concentration and interconnectedness) and enable EU authorities to better monitor and mitigate risk related to the EU's exposure to third-country CCPs. This will help to decrease even further the already low probability (but extremely high-impact) risk of a CCP failure and reinforce the overall stability of the EU financial system as a whole. The enhanced supervisory framework will improve legal and economic certainty as a whole. While there may be upfront economic costs associated with the framework, the 2007-8 financial crisis provides extensive empirical evidence of the benefit of crisis prevention via the most effective possible arrangements for supervision.

Estimating costs related to the preferred options presents limitations as both problems deal with the supervision of CCPs. While the additional costs or the restructuring of costs for EU and national authorities (e.g. additional resources and tasks) can be quantified, the impact for market participants is less straightforward and would be based on hypotheses rendering them questionable. Furthermore, since the preferred option for third-country CCPs is based on a sliding scale of supervisory requirements, the related costs would be CCP-specific and depend on the impact on the EU of the activities of the CCPs supervised or recognised. However it is possible to identify the source of potential costs or efficiencies for market participants.

6.

Potential for regulatory simplification and cost reduction


The aim of this initiative is to streamline the supervision framework for CCPs established in the EU and to strengthen the supervision of third-country CCPs. By centralising at EU level the supervisory work inside a European supervisory mechanism, this initiative removes the duplication of tasks between national authorities. This should create economies of scale at EU level and diminish the need for dedicated resources at national level.

As far as market participants are concerned, CCPs should mainly benefit from a reduction in the administrative burden with a single point of entry for cross-border supervision at EU level.

7.

Impact on market participants (including SMEs)


Concerning the supervision of CCPs established in the EU, under the preferred option, the changes proposed are not expected to have a significant impact on the cost of clearing, whether for clearing members or their clients and indirect clients. In order to fund the European mechanism, CCPs may be required to pay supervisory fees. These would however be proportionate to their activity and would only represent a negligible fraction of their turnover. While these costs may be passed on to the market, these would represent minimal adjustment costs.

Concerning the supervision of third-country CCPs, under the preferred option, the costs would mostly materialise in case EU authorisation and establishment is triggered as part of the sliding scale of supervisory requirements. With the exception of the location requirement, for Tier 1 CCPs and Tier 2 CCPs, the situation would be close to that of CCPs established in the EU, with limited supervisory fees to fund the European mechanism. This would trigger only limited additional costs to market participants.

A core number of staff will be required in order to set up and operationalise the European supervisory mechanism to conduct the daily business of supervision of the 17 CCPs currently established in the EU. Assuming all third-country CCPs requesting recognition are recognised eventually, that would mean around 40 third-country CCPs under the Executive Session's competence – either indirectly through monitoring and information exchange (i.e. Tier 1 CCPs) or, in addition to that, through more direct supervision of Tier 2 CCPs that present potentially more significant risks.

Thus, taking account of the number of third-country CCPs to be supervised either indirectly or directly, type and complexity of tasks to be fulfilled for Tier 1 and Tier 2 CCPs respectively, the number of full time equivalents needed is estimated at roughly 49. Overall the additional costs related to the preferred options for CCP supervision should amount to approximately €7 million per year.

Beyond supervision-related costs, most of the costs that clearing counterparties (clearing members and their clients) would face would relate to the introduction of an EU authorisation and establishment requirement for substantially systemic Tier 2 CCPs. These costs would be driven by legal and operational considerations as well as, if not properly calibrated, by market fragmentation and the related consequences for market liquidity and execution prices. Positive or negative adjustments in margin efficiencies would largely depend on the ability of market participants to substitute third-country CCPs with CCPs established in the EU. The drivers of these costs are detailed under Section 5.3 of the impact assessment report accompanying this proposal.

In addition, a location policy that would not be tailored to the systemic risk of the third-country CCP, defined according to objective criteria, could have an impact on the costs of clearing, the access to indirect clearing for clients of clearing members (including non-financial counterparties and small financial counterparties) and therefore generally in the ability to hedge risks for EU counterparties.

Nevertheless, this has to be weighed against the benefits associated with better crisis prevention. Overall, businesses, SMEs and micro-entreprises will benefit from the increased stability of CCPs and the continuity of their key critical functions should a crisis occur in the future which would lead to their distress or failure. The probability of such a crisis occurring should be further reduced through the enhanced ability of the relevant authorities in the EU to prevent the build-up of systemic risk within EU CCPs and to mitigate the transmission of harmful financial distress through third-country CCPs. As a result, the potential for negative knock-on effects of a crisis affecting the financial sector – e.g. reduced readiness and/or capacity of the banking sector to provide financing to the real economy, recessions etc. – that tends to heavily impact SMEs and their ability to secure funding would also be reduced.

In addition, by clarifying supervisory arrangements both for EU and third-country CCPs, and in combination with the Commission's recent EMIR REFIT initiative on the reduction of excessive costs for smaller counterparties, the proposal should help to promote further the use of central clearing and facilitate the ability of SMEs to access financial instruments, either to hedge their transactions or to invest. The proposal will therefore facilitate further cross-border transactions within the EU and promote an efficient and competitive EU CCP market, thereby contributing to the objectives of the CMU.

8.

Impact on the EU budget


Overall, the changes envisaged for the supervision of EU CCPs would have no impact on the budget of the EU, as any additional costs such as extra resources for the European mechanism would be covered by supervisory fees collected from CCPs. Such changes should, however, eventually benefit all market participants and member states as they should result in a safer clearing market within the EU. Further consideration on the financial impact of strengthening supervision for CCPs established inside the EU are discussed in the sections below.

Similarly, the changes envisaged to mitigate the risks posed by third-country CCPs would also have no impact on the budget of the EU, as any additional resources for the European mechanism would also be funded through the collection of supervisory fees from third-country CCPs. This would however be beneficial to the EU as it would reduce the probability of importing financial stability risks inside the EU and ensure that EU counterparties transacting with third-country CCPs operate in a safe environment, thereby promoting strong and stable global markets.

3.5.Fundamental rights

The EU is committed to high standards of protection of fundamental rights and is signatory to a broad set of conventions on human rights. In this context, the proposal is not likely to have a direct impact on these rights, as listed in the main UN conventions on human rights, the Charter of Fundamental Rights of the European Union which is an integral part of the EU Treaties, and the European Convention on Human Rights (ECHR).

4. BUDGETARY IMPLICATIONS

The changes envisaged to enhance the supervision of EU CCPs and to mitigate the risks posed by third-country CCPs are not expected to have an impact on the budget of the EU.

Possible additional tasks arising for ESMA, such as the processing of the registration of third-country CCPs and their ongoing supervision, could lead to a need for an increase of ESMA’s planned resources. However, any additional costs for the EU budget would be alleviated by mechanisms to increase the financing of the European mechanism, such as the collection of fees from the EU-based and third-country CCPs that it would directly supervise.

The financial and budgetary impact of the proposal is indicated in the legislative financial statement annexed to this proposal.

5. OTHER ELEMENTS

5.1.Implementation plans and monitoring, evaluation and reporting arrangements

The proposal includes a requirement stating that an evaluation of EMIR in its entirety should be carried out, with a particular focus on the effectiveness and efficiency of the proposed supervisory arrangements in meeting EMIR's original objective to increase financial stability. The evaluation should thus consider all aspects of EMIR, but in particular the following:

·Number of CCPs that have entered into recovery or resolution;

·Number of times the dispute resolution mechanism has been used by national competent authorities;

·Number of on-site inspections of third-country CCPs;

·Number of recognised third-country CCPs;

·Number of infringements of equivalence and/or recognition conditions by third-country CCPs;

·Estimated costs to EU counterparties.

In principle, this evaluation should take place at least 5 years after the application of these amendments.

The evaluation should seek to collect input from all relevant stakeholders, but in particular from CCPs, clearing members, non-financial counterparties, small financial counterparties and in general clients and indirect clients of clearing members. Input would also be required from ESMA as well as national authorities and central banks. Statistical data for the analysis should be sought from ESMA.

5.2.Detailed explanation of the specific provisions of the proposal

9.

5.2.1.Creation of the CCP Executive Session within ESMA's Board of Supervisors


Amendments to specify the relation between the CCP Executive Session and the ESMA Board of Supervisors (ESMA Regulation, 4, 6, 40, 42, 43)

Article 1(1) introduces new paragraph i in Article 4 of the ESMA Regulation to provide a definition of a CCP aligned with that of EMIR.

Article 1(2) inserts new point (1a) in Article 6 of the ESMA Regulation to establish a Board of Supervisors in Executive Session (CCP Executive Session) within ESMA in the field of supervision of Union and third-country CCPs.

Article 1 i inserts new point (f) in Article 40(1) of the ESMA Regulation so that to establish that the Head and the two Directors of the CCP Executive Session shall be non-voting members of the Board of Supervisors of ESMA.

Article 1(5) amends the first subparagraph of Article 42 of the ESMA Regulation to provide that the Chairperson, the voting members of the Board of Supervisors, the Head and the two Directors of the CCP Executive Session shall act independently and objectively in the interest of the Union.

Article 1(6) amends paragraph (1) of Article 43 of the ESMA Regulation to establish the distinction between the tasks of the Board of Supervisors and the tasks of the CCP Executive Session. Article 1(6) also replaces paragraph (8) of Article 43 of the ESMA Regulation to add that the Board of Supervisors shall exercise authority over the Executive Director in agreement with the CCP Executive Session.

10.

Amendments with a view to establishing the organisation of the CCP Executive Session (ESMA Regulation, new Articles 44a to 44c)


In order to establish how the Board of Supervisors in Executive Session (CCP Executive Session) will be organised within ESMA, Article 1(7) inserts new Articles 44a, 44b, and 44c as part of new Section 1A in Chapter III of the ESMA Regulation. New Section 1A establishes the composition of the CCP Executive Session, its tasks and its decision-making powers to ensure a coherent supervisory approach across the EU, an appropriate level of expertise as well as a swift and effective decision-making process in relation to CCP supervision.

New Article 44a provides that the Board of Supervisors in its CCP Executive Session shall be composed of: (i) permanent members, including an independent Head and two Directors, who shall be voting, and a representative of the ECB and of the Commission, who shall be non-voting; and (ii) members specific to each CCP, including a representative of the competent authority of the Member State where the CCP is established, who shall be voting, and a representative of the relevant central bank(s) of issue, who shall be non-voting. The permanent members should participate in all meetings of the CCP Executive Session. CCP specific members should participate where necessary and appropriate for CCPs' under their supervision. The Head may also invite other members of the current college of supervisors under Article 18 of EMIR and representatives of authorities of third-country CCPs recognised by ESMA as observers to ensure that the views of the other relevant authorities are sufficiently taken into account by the CCP Executive Session. The presence of independent permanent members and CCP-specific members will ensure that decisions made in the CCP Executive Session are both consistent, appropriate and proportionate across the EU and that the relevant national competent authorities, central banks of issue and observers are involved in the decision-making on issues concerning a CCP established in a Member State. When deciding on a third-country CCP, only the permanent members of the CCP Executive Session and the relevant central banks of issue of Union currencies should participate in the decision-making process.

New Article 44b provides that the CCP Executive Session shall perform a list of specific tasks assigned to it pursuant to EMIR to ensure the proper functioning of the internal market as well as the financial stability of the Union and the Member States. References to ESMA in the amendments to EMIR in this proposal therefore refer to the CCP Executive Session unless otherwise stated. It also provides that the CCP Executive Session shall have dedicated staff and adequate resources in order to guarantee its autonomy, independence and adequate functioning.

New Article 44c establishes that, in order to guarantee a swift and effective decision-making process, the CCP Executive Session shall take its decisions by a simple majority of its members in accordance with the voting rights established under new Article 44a(1), and that the Head shall have a casting vote in case of a tie.

11.

Amendments to establish the accountability and independence of the members of the CCP Executive Session (ESMA Regulation, new Article 48a, Articles 49 and 50)


Article 1(8) replaces the title of Section 3 of Chapter III of the ESMA Regulation to establish the requirements that apply to the Head and the two Directors of the CCP Executive Session.

Article 1(9) inserts new Article 48a to provide for the appointment and the tasks of the Head and Directors of the CCP Executive Session. Article 48a(2) establishes that the Head and the two Directors shall be appointed on the basis of merit, skills, knowledge of clearing, post-trading and financial matters, and of experience relevant to CCP supervision and regulation in order to ensure an appropriate level of expertise, on the basis of an open selection procedure. Article 48a i specifies that the Commission will make a proposal for the appointment of candidates to the European Parliament for approval. Following the European Parliament's approval, the Council will adopt an implementing decision appointing Head and the two Directors. The involvement of the co-legislators in the appointment procedure will ensure transparency and democratic control. In addition, Article 48a(5) establishes that the Council may, on a proposal from the Commission approved by the European Parliament, adopt an implementing act to remove the Head or the Directors under certain conditions, in order to make them accountable to the European Parliament and the Council and to safeguard the rights of the Union institutions.

Article 1(10) amends Article 49 of the ESMA Regulation to establish that the Head and the Directors of the CCP Executive Session shall act independently and objectively in the Union interest.

Article 1(11) amends Article 50 of the ESMA Regulation to provide that, in order to ensure democratic accountability, the European Parliament and the Council may invite the Head of the CCP Executive Session to make a statement, whenever requested. In addition, the Head of the CCP Executive Session is required to report in writing on the main activities of the CCP Executive Session to the European Parliament where requested and to report any relevant information requested by the European Parliament on an ad hoc basis.

Amendments to specify the interactions between the CCP Executive Session and the tasks of the Executive Director of ESMA, the establishment of the budget and professional secrecy (ESMA Regulation, Articles 53, 63 and 70)

Article 1(12) amends Article 53 of the ESMA Regulation to establish the interaction between the CCP Executive Session and the tasks of the Executive Director of ESMA. Point (a) of Article 1(12) amends paragraph (2) of Article 53 to specify that the Executive Director shall take into account the guidance of the CCP Executive Session for implementing the annual work programme of ESMA, under the control of the Management Board. Point (b) of Article 1(12) amends paragraph i of Article 53 to establish that the Executive Director shall obtain the endorsement of the CCP Executive Session for the tasks under its responsibility when preparing the multi-annual work programme, prior to forwarding it to the Management Board. Point (c) of Article 1(12) amends paragraph (7) of Article 53 to require the Executive Director to obtain the endorsement of the CCP Executive Session for the tasks under its responsibility when preparing the draft report on the activities of ESMA, prior to forwarding it to the Management Board.

Article 1(13) inserts new paragraph (1a) in Article 63 of the ESMA Regulation to establish that the expenditure and the fees related to the tasks of the CCP Executive Session shall be separately identifiable within ESMA's statement of estimates. The CCP Executive Session shall approve the draft prepared by the Executive Director relating to such expenditure and fees prior to the adoption of the statement of estimates.

Article 1(14) amends paragraph (1) of Article 70 in the ESMA Regulation to provide that members of the CCP Executive Session shall be subject to the requirements of professional secrecy pursuant to Article 339 TFEU and the relevant provisions in Union legislation, even after their duties have ceased.

12.

Amendments with a view to enhancing ESMA's ability to collect information (ESMA Regulation, Article 35)


Article 1(3) replaces the sixth paragraph of Article 35 of the ESMA Regulation to provide that, where complete information is not available from the competent authorities or other entities in the Member State, ESMA may request information directly from an authorised or recognised CCP, an authorised central securities depository and an authorised trading venue. ESMA shall inform the competent authorities of such requests.

13.

5.2.2.Supervision of CCPs established in the Union


Amendments to the conditions and procedures for the authorisation of a CCP established in the EU (EMIR Articles 17, 18, 19, 20 and 21)

Procedure for granting and refusing authorisation

Article 2(2) amends paragraph (3) of Article 17 of EMIR so that the assessment by a competent authority of the completeness of a CCP's application is undertaken in consultation with ESMA and that ESMA and the college are informed of any additional information the competent authority has received regarding an application.

14.

Chair and composition of the college


Article 2(3) amends Article 18 of EMIR to clarify the assignment of responsibilities between authorities within the college. New Article 18(1) provides that the college shall be chaired and managed by the Head of the CCP Executive Session. New point (a) in Article 18(2) of EMIR establishes that the college the permanent members of the CCP Executive Session shall attend the college instead of ESMA. New point (c) in Article 18(2) of EMIR adds, where relevant, the ECB in accordance with Council Regulation (EU) No 1024/2013, to the competent authorities responsible for the supervision of the clearing members of the CCP that are established in the three Member States with the largest contributions to the default fund of the CCP referred to in Article 42 on an aggregate basis over a one-year period.

15.

Opinion of the college


Article 2 i amends Article 19(3) of EMIR regarding the voting rights of members of the college to establish that the permanent members of the CCP Executive Session shall have one vote each, with the exception of the representative of the Commission, who shall be non-voting.

16.

Withdrawal of authorisation


Article 2(5) amends Article 20(6) of EMIR to provide that a CCP's competent authority shall send ESMA and the members of the college its fully reasoned draft decision of the withdrawal of authorisation.

17.

Review and evaluation


Points (a) and (b) of Article 2(6) replace paragraphs (1) and (3) of Article 21 of EMIR relating to the review and evaluation of authorised CCPs. New Article 21(1) provides that the review and evaluation by a competent authority of a CCP's compliance with EMIR is undertaken in cooperation with ESMA. New Article 21(3) establishes that ESMA will establish the frequency and depth of such a review and evaluation, and provides that ESMA staff should be invited to participate in any on-site inspections. It also requires the competent authority to forward to ESMA any information that it receives from a CCP and that the competent authority requests any information sought by ESMA which it cannot provide from the relevant CCP.

18.

Amendments relating to the authorisation and supervision of CCPs established in the EU (EMIR, new Articles 21a, 21b and 21c)


Article 2(7) inserts new Articles 21a, 21b and 21c in EMIR to establish the role of the CCP Executive Session in relation to the authorisation and supervision of CCPs and to clarify the assignment of responsibilities between authorities.

While national competent authorities continue to exercise their current supervisory responsibilities under EMIR, the prior consent of ESMA, and where appropriate, of the relevant central bank(s) of issue, is required for certain decisions in order to promote CCP supervisory convergence throughout the Union. New Article 21a provides that competent authorities will prepare final draft decisions and submit them to the prior consent of ESMA for decisions relating to access to a CCP, access to a trading venue, authorisation of a CCP, extension of activities and services of a CCP, capital requirements, withdrawal of authorisation, review and evaluation, shareholders and members with qualifying holdings, information to competent authorities, review of models, stress testing and back testing, and approval of interoperability arrangements. Any other decision relating to the application of Article 22 in connection with the requirements set out for CCPs and interoperability arrangements in Titles IV and V of EMIR will also be subject to ESMA's prior consent. If ESMA proposes amendments to certain final draft decisions of a competent authority, such decisions shall be adopted only once they have been amended as requested by ESMA. If ESMA objects to certain final draft decisions of a competent authority, those decisions shall not be adopted. New Article 21a also introduces a dispute-resolution mechanism in case of disagreement between ESMA and the national competent authorities. If a competent authority disagrees with the amendments or the objections by ESMA against certain of the competent authority's final draft decisions, the matter shall be referred for a final decision to the Board of Supervisors of ESMA. Finally, new Article 21a provides that ESMA may adopt an individual decision on financial market participant where national competent authorities deny the opinion or requests from ESMA.

Similarly, the prior consent of the relevant central banks of issue is required for certain decisions envisaged by national competent authorities, due to the potential risks that the malfunctioning of a CCP could pose to the definition and implementation of the monetary policy of the Union and the promotion of the smooth operation of payment systems. While the mandates of central banks and supervisors may overlap, there is potential for misalignment when supervisory actions impact on key responsibilities of central banks in areas such as price stability, monetary policy and the payment systems. New Article 21b provides for the tasks of the relevant central bank of issue in order to establish the assignment of responsibilities between authorities, in particular when it relates to a CCP's payment and settlement arrangements and related liquidity risk. Management procedures for the transactions denominated in that central bank of issue's currency. New Article 21b provides that competent authorities shall obtain the consent of the relevant central banks of issue for decisions relating to authorisation of a CCP, extension of activities and services of a CCP, withdrawal of authorisation, margin requirements, liquidity risk controls, collateral requirements, settlement and approval of interoperability arrangements.

In case the relevant central bank of issue objects to the draft decisions of a competent authority in these areas, those decisions shall not be adopted. In case the relevant central bank of issue proposes amendments to the draft decisions of a competent authority in these areas, those decisions shall be adopted only as amended.

New Article 21c provides that both CCPs established in the Member States and third-country CCPs shall pay fees for ESMA's supervisory and administrative tasks for (i) applications for authorisation referred to in Article 17, (ii) applications for recognition under Article 25, and (iii) annual fees associated with the tasks under ESMA's responsibility. The Commission will specify further in a delegated act the types of fees, the matters for which fees are due, the amount of the fees and the manner in which they are to be paid by authorised and applicant Union CCPs, recognised third-country CCPs that are not systemically important (Tier 1 CCPs) and recognised CCPs that are, or are likely to become, systemically important for the financial stability of the Union or for one or more of its Member States (Tier 2 CCPs). These supervisory fees will enable to finance the tasks of the CCP Executive Session and enable ESMA to fulfil its responsibilities.

19.

Amendments relating to cooperation between authorities (EMIR, Article 24)


Article 2(8) amends Article 24 of EMIR to add potential adverse effects to the transmission of monetary policy and the smooth operation of payment systems to situations of emergency for which the CCP’s competent authority or any other authority shall inform ESMA, the college, the relevant members of the ESCB and other relevant authorities without undue delay.

20.

5.2.3.Third-country CCPs


In the five years since the adoption of EMIR, the volume of CCP activity – in the EU and globally - has grown rapidly in scale and in scope. Central clearing has gained in importance for interest rate and credit derivatives The rapidly expanding role of CCPs in the global financial system reflects not only the introduction of central clearing obligations across different asset classes, but also increased voluntary use of central clearing amid growing awareness of the benefits of central clearing among market participants. EMIR already requires certain interest-rate derivatives and credit default swaps to be centrally cleared in line with similar requirements in other G20 countries. Bank capital rules have also been changed to incentivise central clearing and make bilateral clearing a costlier option in relative terms, while bilateral transactions are subject to additional collateral requirements since March 2017. As a result, clearing has increased, but is now concentrated in a relatively limited number of global CCPs.

Currently, 28 third-country CCPs have been recognised under EMIR's equivalence provisions. A further 12 CCPs from 10 jurisdictions have applied for recognition and are awaiting a decision of the Commission as regards the equivalence of their regulatory and supervisory regimes.

21.

Amendments with a view to enhancing the implementation of the equivalence of third-country CCP regimes (EMIR, Article 25(6))


The Commission will continue to determine by way of equivalence decisions that the legal and supervisory frameworks of third countries fulfil the requirements under EMIR for the purpose of enabling the recognition of CCPs based in those third countries. This proposal confirms that the Commission may subject an equivalence determination to further conditions. Point (e) of Article 2(9) inserts new paragraphs (6a) and (6b) so that the Commission may, if necessary, specify by way of a Delegated Act the criteria to be used in its assessment for granting equivalence to third-country CCP regimes. New paragraph (6b) in Article 25(6) of EMIR tasks ESMA with the monitoring of regulatory and supervisory developments in third-country CCP regimes that have been deemed equivalent by the Commission.

22.

Amendments regarding the recognition of third-country CCPs (EMIR, Article 6, paragraphs (2), new (2a), new (2b) and new (2c) in Article 25, and new Article 25a)


Increased transparency

To improve transparency to stakeholders and the public as a whole, EMIR is amended to clarify the registration of CCPs by providing more details in ESMA's public register (Article 2(1) amends point (b) in Article 6(2)).

No additional requirements have been introduced in the proposal for recognised third-country CCPs.

23.

Classification of non-systemically important third-country CCPs (Tier 1) and systemically important third-country CCPs (Tier 2)


In view of the global increase in clearing and concentration of risk in a limited number of global CCPs, a differentiation needs to be introduced according to the type of third-country CCP recognised under EMIR.This proposal therefore requires that, when considering an application for recognition, ESMA will need to consider the degree of systemic risk presented by a third-country CCP. In order to achieve this, and to introduce a proportionate application of the requirements, a distinction needs to be made between lower risk CCPs and those that are, or will be, systemically important for the Union or one or more of its Member States. This reflects the fact that not all third-country CCPs are of equal systemic importance. This will depend on their scope and type of transactions cleared as well as the volume of their clearing activity. For example, a relatively small third-country CCP that clears only a limited number of contracts that are, for example, denominated in local currency will objectively pose fewer concerns and less risk to the Union's financial system than a third-country CCP that clears significant volumes of contracts that are denominated in a Union currency.

It is therefore proposed that ESMA has the power to distinguish between CCPs that are, or are likely to become systemically important and those that are not. Third-country CCPs that ESMA has determined as non-systemically important or not likely to become systematically important for the Union and the Member States are referred to as Tier 1 (Point (a) of Article 2(9) inserts point (e) in Article 25(2) of EMIR). These Tier 1 CCPs will continue to be subject to the current arrangements and conditions for third-country equivalence decisions adopted by the Commission, and which allow ESMA to recognise individual third-country CCPs. ESMA will also be tasked with new responsibilities in relation to the supervision over these recognised Tier 1 CCPs.

In contrast to Tier 1 CCPs, ESMA will also be able to determine a different category of third-country CCPs which are deemed to be systemically important or likely to become systemically important in the near future for the financial and economic stability of the Union and of the Member States (so called Tier 2 CCPs).This is provided for in point (c) of Article 2(9) which inserts a new paragraph (2a) in Article 25 of EMIR.

In order for ESMA to determine whether a third-country CCP is a Tier 2 CCP, four objective criteria are provided for (new Article 25(2a)):

(i) the nature, size and complexity of the third-country CCP's business;

(ii) the effect that the failure of, or a disruption to, the third-country CCP would have on critical markets, financial institutions, or the broader financial system and on the financial stability of the EU;

(iii) the third-country CCP's clearing membership structure, and

(iv) the third-country CCP's relationship, interdependencies, or other interactions with other financial market infrastructures.

These criteria will need to be further specified by the Commission in a delegated act (second subparagraph of Article 25(2a)) within six months of the adoption of the Regulation.

The consequence of ESMA determining a third-country CCP to be a Tier 2 CCP is that that CCP can only be recognised and permitted to provide clearing services or activities in the Union if it meets further conditions. These conditions are necessary to reflect the additional concerns that arise for the financial stability to the Union and one or more of the Member States. CCPs that have already been recognised under the current EMIR regime will continue to be recognised as Tier 1 CCPs until ESMA has determined whether such third-country CCPs are Tier 2 CCPs.

24.

Proportionate requirements for systemically important Tier 2 third-country CCPs


The additional requirements that systemically important third-country CCPs must fulfil are fourfold (See point (b) of Article 2(9)):

(i) ongoing compliance with the relevant and necessary prudential requirements for EU-CCPs. These requirements concern capital requirements, requirements for the internal organisation management, conduct of business, margins, default fund, financial resources, liquidity, investments, stress tests, settlement and interoperability. They are currently set out in Article 16 and in Titles IV and V of EMIR;

(ii) written confirmation – within 180 days – from the relevant EU central banks of issue that the third-country CCP complies with any requirements imposed by those central banks. Those additional requirements would be imposed by the central banks in the exercise of their monetary policy tasks. By way of example, they could include additional requirements to address risks for liquidity, payment or settlement arrangements in the Union or Member States. In more particularity they could concern the availability and specific type of collateral held within a CCP, the level of any haircuts applied to collateral, investment policy or collateral segregation, the availability of liquidity arrangements between central banks involved, the potential impact of the CCP's operations and the implications of their possible disruption or failure for the financial system and stability of the Union.

(iii) to enable ESMA to exercise its new supervisory responsibilities there must also be written consent by the third-country CCP that ESMA may access any information held by the CCP and may access any of its business premises upon request. Naturally, this needs to be able to be enforced in the third country, and a legal opinion should be available confirming that this is the case;

(iv) the third-country CCP should have all the necessary procedures and measures to be able to comply with the first and third condition above.

As the requirements above need to be applied in a proportionate manner, the proposal introduces a system according to which a third-country CCP may continue to rely on the rules and requirements in its own country. This new system of comparable compliance – which complies with FSB standards and reflects a similar system applied by the US authorities – relies on a simple procedure under which the third-country CCP can request ESMA to compare EMIR's requirements and EU supervisory standards for CCPs with those of the third country. Where comparable, ESMA may determine that the application of some or all of the requirements in place as well as the corresponding supervisory enforcement in that third country provides a comparable outcome to the application of EMIR and waive the application of corresponding EMIR provision. This approach will significantly reduce any burdens resulting from dual application of rules and requirements. The Commission will be required to adopt a delegated act to specify the details of assessment that ESMA carries out (new Article 25a).

However, in view of the growing concentration of clearing services in a limited number of global CCPs, and the increased risk which that concentration entails, some CCPs may be of specifically substantial systemic significance for the EU financial system. Therefore, when making its determination whether a third-country CCP is, or is likely to become, systemically important, ESMA may also determine, in agreement with the relevant EU central bank(s), that the risks posed by that entity to the Union's financial stability or to one or more of the Member States are of such magnitude that even a system of full application of EMIR to this third-country CCP is not enough to sufficiently mitigate such risks and that it should therefore not be recognised. Where such determination that the challenges for safeguarding financial stability in the EU that cannot be addressed through the recognition process of third-country CCPs is made, it is proposed that ESMA, in agreement with the relevant EU central banks, has the power to recommend to the Commission, that that CCP should not be recognised. On that basis, the Commission is empowered to take a decision that that CCP should not be recognised and if it wishes to provide clearing services in the Union, it should be authorised and established in one of the Member States (new paragraph (2c) of Article 25).

25.

Amendments to enhance the ongoing supervision of third-country CCPs post-recognition (EMIR Articles 25(5), 25(6), 25(7), new Articles 25b to 25m)


ESMA supervision over third-country CCPs

In order to respond to the shortcomings in the implementation of EMIR’s system of equivalence and recognition for the supervision of third-country CCPs, the powers of ESMA are proposed to be enhanced. This will ensure that difficulties for ESMA in accessing information from a CCP, conducting on-site inspections of the CCP and sharing information with the relevant EU regulators, supervisors and central banks will be addressed. This will minimise the risk that CCP practices and/or adjustments to risk management models go undetected, with important financial-stability implications for the EU entities. Second, this will respond to potential for misalignments between supervisory and central-bank objectives within colleges in the context of third-country CCPs where non-EU authorities are involved. Finally, the risk that changes to the CCP rules and/or regulatory framework in a third-country which could negatively affect the regulatory or supervisory outcomes is addressed. This means that level-playing fields will be ensured between EU and third-country CCPs, and scope for regulatory or supervisory arbitrage will be removed. ESMA's new responsibilities to exercise supervision over recognised Tier 1 and Tier 2 CCPs are provided for in the new Article 25b (see below).

26.

Enhanced implementation of the current recognition regime


Point (c) of Article 2(9) replaces Article 25(5) of EMIR to specify that ESMA must review at least once every two years the recognition of a third-country CCP that has extended its activities and services in the Union. Provisions relating to the withdrawal of the recognition of a third-country CCP have been moved to new Articles 25m and 25n (see below).

Point (f) of Article 2(9) replaces the first sentence of Article 25(7) of EMIR to provide that the cooperation arrangements between ESMA and the relevant competent authorities of equivalent CCP third-country regimes must be effective in practice.

Point (g) of Article 2(9) amends point (d) in Article 25(7) to specify that the procedures concerning the coordination of supervisory activities should include the agreement of third-country authorities to allow investigations and on-site inspections in accordance with Article 25d and 25e of this proposal. Point (g) also inserts a new point (e) in Article 25(7) establishing that the cooperation arrangements between ESMA and the relevant competent authorities of equivalent CCP third-country regimes must specify the procedures necessary for the effective monitoring of regulatory and supervisory developments in a third country. 42

27.

New role for ESMA and the relevant central bank(s) of issue in the supervision of recognised third-country CCPs


Article 2(10) inserts new Articles 25b to 25n in EMIR to grant ESMA new powers to supervise recognised Tier 1 and Tier 2 third-country CCPs to strengthen the monitoring and enforcement of the ongoing compliance of third-country CCPs with EMIR requirements. It also provides for the involvement of the relevant central banks of issue in the recognition and supervision of third-country CCPs in relation to financial instruments denominated in Union currencies that are cleared to a significant extent in CCPs located outside the Union, in order to mitigate risks for the Union internal market and the financial stability of the Union or for one or more of its Member States.

New Article 25b provides ESMA with new powers to ensure the ongoing compliance of Tier 1 and Tier 2 third-country CCPs.

Paragraph (1) of new Article 25b provides that ESMA shall be responsible for the ongoing supervision of the continued compliance of Tier 2 CCPs with the prudential requirements set out in Article 16 and Titles IV and V of EMIR. In addition, ESMA will require confirmation from each Tier 2 CCP that it fulfils all the other additional supervisory requirements established in Article 25(2b) at least on a yearly basis, in accordance with the second subparagraph of Article 25b(1). The relevant central bank(s) of issue will also immediately notify ESMA if it deems that a Tier 2 CCP no longer fulfils the conditions established in Article 25(2b)(b).

Paragraph (2) of new Article 25b provides that ESMA shall obtain the consent of the relevant central bank(s) of issue prior to the adoption of decisions relating to margin requirements, liquidity risk controls, collateral requirements, settlement and approval of interoperability arrangements. In case the relevant central bank(s) of issue objects to the draft decision, ESMA shall not adopt it. In case the relevant central bank(s) of issue proposes amendments to the draft decision, ESMA may only adopt it as amended.

Paragraph (3) of new Article 25b provides that ESMA shall carry out its assessment of the resilience of recognised CCPs to adverse market conditions in accordance with the common methodologies established in Article 32(2) of the ESMA Regulation.

New Article 25c establishes that a request or a decision by ESMA may require a third-country CCP and related third parties to provide all necessary information to allow ESMA to carry out its duties under EMIR.

New Article 25d establishes that a decision by ESMA may require a Tier 2 third-country CCP to submit to general investigations.

New Article 25e establishes that a decision by ESMA may require a Tier 2 third-country CCP to submit to on-site inspections. ESMA should give notice of its intention to carry out an on-site inspection to the competent authorities of the third country. Those authorities may also participate in the inspection. The central bank(s) of issue shall be invited to participate in such on-site inspections.

New Articles 25f and 25i establish procedural rules, including respect of the rights of defence, in the event of serious indications of possible infringements by third-country CCPs to provide all necessary information or to submit to general investigations and on-site inspections. Paragraph (13) of Article 2 inserts a new Annex III in EMIR providing a list of possible infringements by a third-country CCP, including: (i) infringements relating to capital requirements; (ii) infringements relating to organisational requirements or conflicts of interest; (iii) infringements relating to operational requirements; (iv) infringements relating to transparency and the availability of information; and (v) infringements relating to obstacles to the supervisory activities.

New Article 25g provides for fines in case of established infringements by third-country CCPs. Paragraph (13) of Article 2 inserts a new Annex IV in EMIR providing a list of aggravating and mitigating factors of certain possible infringements by a third-country CCP.

New Article 25h provides for effective and proportionate periodic penalty payments to be imposed by a decision of ESMA on third-country CCPs in certain situations. Penalties can be imposed to end infringements, supply information or submit to investigations or inspections.

New Article 25j provides that ESMA shall disclose to the public, subject to certain conditions, each instance where fines or periodic penalty payments have been imposed on third-country CCPs.

New Article 25k provides for review by the Court of Justice of any ESMA decision imposing fines or periodic penalty payments on third-country CCPs.

New Article 25l empowers the Commission to adopt delegated acts in order to take account of developments in financial markets concerning measures to amend Annex IV of EMIR.

New Article 25m in EMIR establishes that ESMA shall withdraw partially or in its entirety a decision recognising a third-country CCP if certain conditions are met.

New Article 25n establishes that ESMA shall take one or more decisions when it finds that a Tier 2 third-country CCP has committed an infringement, including a requirement that the CCP brings the infringement to an end, fines, public notices, and the withdrawal of that CCP's recognition.

28.

5.2.4.Prudential requirements applicable to CCPs


Amendments related to model and parameter validation (EMIR Article 49)

Up to now, Article 49 required, in addition to an independent validation to be obtained by the CCP, two separate validations by the NCA and ESMA of significant changes to the models and parameters adopted to calculate the CCP's margin requirements, default fund contributions, collateral requirements, and other risk-control mechanisms. Point (b) of Article 2(11) inserts new paragraphs (1a), (1b), (1c), (1d), (1e) and (1f) in Article 49 of EMIR to clarify the conditions under which a CCP may obtain the validation of significant changes to its adopted models and parameters. According to paragraph (1a) the NCA's validation is sufficient, because Article 2(7) introduces a new Article 21a in EMIR which requires ESMA's prior consent to the NCA's validation decision under Article 49 of EMIR. Thus, a separate validation by ESMA is not necessary anymore. When a CCP plans to adopt any significant change to the models and parameters, it shall apply to the competent authority for validation of that change. The competent authority, in consultation with ESMA, shall conduct a risk assessment of the CCP and submit a report to the college, which shall then adopt a majority opinion. After adoption of such an opinion, the competent authority shall inform the CCP whether validation has been granted or refused. In addition, the new paragraphs provide for a legal basis for the preliminary adoption of a significant change to models or parameters in case of need.

Point (a) of Article 2(11) amends Article 49(1) of EMIR accordingly and abolishes the requirement of two validations. The adopted models and parameters stay subject to an opinion of the college in accordance with a process defined in that Article. The last subparagraph of the amended Article 49(1) stipulates that ESMA shall relay the information on the results of the stress tests not only to the European Supervisory Authorities, but also to the ESCB and the Single Resolution Board, to enable them to assess the exposure of financial undertakings to the default of CCPs.

29.

5.2.5.Transitional provisions


Amendments to establish transitional arrangements to enable the review of recognition decisions adopted before the entry into force (EMIR, Article 89)

Paragraph (12) of Article 2 inserts a new paragraph in Article 89 establishing certain transitional arrangements to provide that new Articles 25(2)(e) and 25(2a) will apply upon the entry into force of the delegated act establishing the criteria for determining a Tier 2 CCP, and referred to in the second subparagraph of Article 25(2a). Article 2(12) also provides for ESMA to review third-country CCPs recognition decisions adopted before this proposal enters into force. The new provision states that this review shall take place within 12 months from the entry into force of the delegated act spelling out the criteria for determining whether a third-country CCP is, or is likely to become, systemically important for the financial stability of the Union or for one or more of its Member States.