EU Commission proposes more robust supervision of CCPs

There has been much recent coverage in the press about whether the EU would require a location requirement for EUR Swaps Clearing. (See City AM, Reuters, Risk.Net).

Today the EU Commission put out a press release proposing more robust supervision of CCPs.

What have they said pertinent to the debate about Brexit and LCH Clearnet Ltd?

Lets extract the key text:

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For non-EU CCPs, the proposal builds on the existing third-country provisions in EMIR and will make the process to recognise and supervise third-country CCPs more rigorous for those which are of key systemic importance for the EU. The aim is to address important challenges in derivatives clearing as its scale and importance grows and to take account of the role played by third-country CCPs in the clearing of financial instruments relevant to EU financial stability.

The proposal introduces a new “two tier” system for classifying third-country CCPs. Non-systemically important CCPs will continue to be able to operate under the existing EMIR equivalence framework. However, systemically important CCPs (so-called Tier 2 CCPs) will be subject to stricter requirements.

These requirements include:

  • compliance with the necessary prudential requirements for EU-CCPs while taking into account third-country rules;
  • confirmation from the relevant EU central banks that the CCP complies with any additional requirements set by those central banks (e.g. the availability or type of collateral held in a CCP, segregation requirements, liquidity arrangements, etc.);
  • the agreement of a CCP to provide ESMA with all relevant information and to enable on-site inspections, as well as the necessary safeguards confirming that such arrangements are valid in the third country.

Depending on the significance of the third-country CCP’s activities for the EU and Member States’ financial stability, a limited number of CCPs may be of such systemic importance that the requirements are deemed insufficient to mitigate the potential risks. In such instances, the Commission, upon request by ESMA and in agreement with the relevant central bank can decide that a CCP will only be able to provide services in the Union if it establishes itself in the EU.

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(full text is here).

So there you have it.

The key points:

  • Systemically important CCPs will be subject to stricter requirements.
  • Confirmation from relevant EU central banks that CCP complies with any additional requirements set by those central banks
  • Agreement of a CCP to provide ESMA with all relevant information to enable on-site inspections, as well as the necessary safeguards confirming that such arrangements are valid in the third country.

And the final catch-all

“a limited number of CCPs may be of such systemic importance that the requirements are deemed insufficient to mitigate the potential risks. In such instances, the Commission, upon request by ESMA and in agreement with the relevant central bank can decide that a CCP will only be able to provide services in the Union if it establishes itself in the EU.”

Clearly LCH Clearnet Ltd and possibly others (?) will fall into Systemically important.

The Summary

No surprises here.

Regulators have left themselves sufficient leeway to insist on location within the EU or not.

The European Central Bank (ECB), as the lender of last resort, will have the key say, which given the 2015 European Court of Justice action that the UK government took against an earlier ECB proposal on location of EUR clearing, means that nothing is decided,

Only time, data, analysis, facts, lobbying, discussion, negotiation, …. will tell.

Nothing unusual there.

We live in interesting times.

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