Trilogue negotiations began last week to discuss EU supervision of the continent's central counterparty clearing houses (CCPs) and third-country CCPs. However, with European Parliament (EP) elections fast approaching, a spokesperson close to the negotiations says that there is considerable pressure to bring the discussions to a conclusion.
“The Parliament goes into recess for the election soon, so this puts a lot of pressure on the discussion, for those that want to finalise them this needs to happen as soon as possible. That's why they have so many meetings almost back to back,” says the source.
“The next meeting is expected to take place week [commencing January 28]. I think they were planning to do in total five of these meetings but that might be subjected to change. The idea would be to get it all done [the negotiations], sometime late February early March, because after that date no more trialogue [meetings] can take place because of the European Parliament election.”
The EP and the Council are still at odds over supervisory authority of EU CCPs, as the debate continues over the continent’s regulatory bodies’ role in overseeing third country CCPs. However, while the latter has drawn criticism from non-EU rules-makers and entities, current proposals that would see EU regulators granted authority over third country CCPs are unlikely to change, according to the source.
“Power for the EU to supervise third-country CCPs will increase, that is a reality,” says the source.
Documents seen by bobsguide outline the EP’s stance on the negotiations. Lengthy discussions are expected to take place over the Parliament’s proposed “enhanced role for [the European Securities and Markets Authority (Esma)] in EU CCP supervision, with a broader scope and depth than the one envisaged by the Council.”
The documents go on to state that “the differences lie in how this role is exercised (consent vs opinion) and in which areas.”
The EP stipulates that Esma’s supervision of third-country CCPs “should take into consideration the business carried out by the CCP in the Union as well as other business of the CCP outside the Union, to the extent that such business outside the Union is likely to affect the overall complexity of the CCP,” according to the documents.
Going against the Council’s recommendation to collect fees just from third-countries, the EP outlines that both Union and third-country CCPs should pay supervisory fees for Esma’s supervisory and administrative tasks.
Roger Storm, deputy CEO and head of risk operations and business development at Swiss clearing house SIX, agrees that there will be a quick turn around with these proposals, as Brexit is an additonal incentive for the EU. However, the proposals, he says, could result in considerable movement of CCPs which the EU may not be prepared for.
“[The EU] has not decided yet but I would expect them to pass the laws now during trilogue, and with less and less changes. That is an indication to me that indeed they are preparing to implement [the proposals], and I think this is tided as well in terms of timing to the Brexit negotiations given that it has been publicly stated that there is irritation on the EU side on the amount of EU trading, and clearing in London, which then would be outside of the EU jurisdiction,” says Storm.
“For the markets, there is a high probability that some of the trading, due to where the CCP decides to sit and which markets to serve, will migrate maybe over to the US, maybe over to Asia, to other places. I wonder if any of the CCPs that do reside in the EU or EEA for that matter, if they have the capacity to ramp up and take on the kind of volumes we are talking about, if that does happen.”
“They then have rewritten the rules, or are possibly writing the rules to say, ‘We will have a closer look in particular at the clearing activity.’ The clearing activity is an essential component of any financial market system,” he says.
A new third country
According to the Capital Market’s Union, 32 third-country CCPs have been recognised under the European Market Infrastructure Regulation (Emir) equivalence provisions.
In December, the European Council set out its stance on a revision of Emir, as well as the statute of the European system of central banks and the European Central Bank (ECB).
The Council’s proposal established a two-tier system for third-country CCPs, between systemically important CCPs and non-systemically important CCPs. According to those proposals, Esma would be in control of producing those lists.
Crucially, Esma as a last resort, would have the power to decide that if a third-country CCP or some of its clearing services were of such substantial systemic importance, it would need to establish itself in the EU in order to be able to operate.
In reaction to the Council’s stance, the United Kingdom stated in an EU permanent representatives committee late last year that the proposal was “unbalanced in the significant powers it gives Esma and the ECB over non-EU CCPs when they are not given these same powers over EU CCPs. This means Esma could potentially have powers to ’dual supervise’ all significant CCPs worldwide except those inside the EU.”
Such a proposal “could become a barrier to market access in the future as third countries are very unlikely to bind their independent supervisors in this way,” continued the statement.
According to the bobsguide source, the EU is determined to implement these increasing supervisory powers, regardless of the UK’s concerns.
“Most member states agreed that on the general principles set out by the European Commission [on third country CCPs], the only one mainly disagreeing was the UK. But the UK of course was in a way, sided in the negotiations. The EU was like, ‘well look this is what you think [UK] we understand that but we don't care, because we're doing this from an EU point of view,’” says the source.
“Even though the UK have expressed their concerns to the approach, the European authorities have continued,” he says.
“I think the Commission expects third countries like the UK to apply for greater powers over EU CCPs, that could also cause concerns for third countries.”
For SIX’s Storm, the implications of dividing third-countries CCPs by systemic importance is concerning.
“Now we don’t know what the criteria are for that distinction between these two groups. It talks about in general terms complexity and size, we don’t really know where they would draw the line. Will it capture just one, two, or several entities?
“When the CCP, even if it is recognised by Esma and the jurisdiction is recognised by the EU commission as having implemented the equivalent laws and onsite regimes, they are still saying, ‘we want our central banks in the EU, both the ECB but also the central bank [of that region], such as the Swedish central bank for the Krona, we [the EU] want to have a right to sit at the table and have a meaningful say at any decision that involves an expansion of that CCP’s activities, a change of its systems, and operating model, or risk model,” says Storm.
“The EU is trying to extend its territoriality rights with the leverage of course being, ‘if you want to work in our [European] market then you need to accept that we will step into your supervision,’ and that is a rather strong debacle in terms of sovereignty for countries such as Switzerland which has gone quite far in opening its own market,” Storm continues.
“[The EU] are very suspicious of others doing similar things, so furthermore they want to actually have a look at my cards, and exactly how have I positioned things on my side behind my fence to look into my strategy, and that is now upsetting quite a lot of people in the market, including the Americans,” he says.
In October, Christopher Giancarlo, chair of the US Commodity Futures Trading Commission (CFTC) said at an industry event that he had asked the EU authorities to “reconsider such an expansive approach.”
He went on to say that “if a satisfactory resolution of this situation cannot be found, the CFTC will have no choice but to consider a range of readily available steps to protect US markets and market participants.”
On January 24, CFTC commissioner Dawn Stump published a piece in the FT suggesting that global regulators need to reconsider clearing house rules.
“Today, global regulators have implemented central clearing mandates for numerous products and updated the rules for the CCPs that now manage more risk. Mission accomplished? Not quite,” wrote Stump.
“Unfortunately, territorial skirmishes are setting up a duplicative, confusing web of requirements for clearinghouses that will create compliance conflicts and vulnerabilities rather than a harmonised, more resilient financial system.
“It is time to recommit to ensuring that our alliance remains strong.
“Today, we can re-assess because other countries and the EU have implemented their own comparable reforms. We are already empowered to do so. The US congress recognised that consistency, not duplication, is the goal: it gave the CFTC the authority to exempt a third-country CCP from registration if we determine that it is subject to comparable, comprehensive rules and supervision at home. It is time to revisit the rationale of compelled registration for comparably regulated foreign CCPs,” she said.
That’s a position SIX’s Storm sympathises with.
“It is a rather strong statement indeed to step into another country’s jurisdiction and oversight regime and that is what the US are saying, ‘well we won’t allow this, and we would like to see a different regime where [the EU] trusts our authorities we’ve implemented some of the laws, you’ve recognised that and that should suffice,’” he says.
“The EU is further pressuring Switzerland in order to change another trade agreement they want Switzerland to sign, which is used in a political or trading situation for a lot of other purposes. This additional oversight regime that they are introducing could be used for more than just the CCP,” says Storm.
For the bobsguide source, the increased supervision proposals by the EU are not all that far away from what the US currently has with regards to authorising third-country CCPs, and that even if the US is unhappy with increased EU supervision, there is little it could do to retaliate.
“Looking at the process that the US currently has with third country CCPs, to be honest, it is quite similar to the one that the EU is proposing. I think the EU one goes a bit beyond the American one, but I wouldn't say that they are dramatically different. I'm not sure what else the US could do regarding retaliation measures, because it is quite similar,” says the source.
“I think the US could do exactly the same if they wanted to.”
Supervision of EU CCPs
“On EU CCPs I think that there are technical differences. The big ones are that in a nutshell, the European Parliament wants to give more power to EU authorities supervision of EU CCPs while the council, they want to give more power, but not as much as the Parliament,” says the bobsguide source.
“My view is that they'll probably be closer to the council's position because the council represents member states, and the states have national competent authorities [NCAs], I think they [the Council] may have a bit more power in these discussions,” says the source.
“I can imagine that would be a bit of an incentive for Parliament to say this is how much we can achieve, so be pragmatic and perhaps in the future because the legislation that includes a review clause, perhaps in the future we can review this again,” he says.
A spokesperson for the AFM – the Dutch NCA – told bobsguide the proposed changes to Esma’s supervision will make it easier for financial institutions operating in multiple EU jurisdictions.
“Currently, the supervision of international capital markets institutions is still mainly done at a national level. The AFM is generally supportive of the Capital Markets Union, including of the greater role of Esma in the supervision of institutions with a strong cross-border-dimension, such as CCPs,” said the spokesperson.
“We believe that strengthening the role of Esma in CCP supervision will contribute to supervisory convergence and a level playing field. Moreover, it may be beneficial to financial institutions who are active in many EU-jurisdictions who will face one EU-supervisor instead of many NCAs to respond and report too. In the field of CCP supervision, AFM thinks it is important to strike the right balance between Capital Markets Supervision (by Esma and national security regulators) and monetary supervision (by central banks, such as the ECB).”