A decision on the tiering between systemically important and non-systemically important third country central counterparties (CCPs) is unlikely to come to a conclusion before the end of this year, said Patrice Aguesse, head of the market regulation division at France’s national conduct authority the Autorité des Marchés Financiers, on a panel discussion at the FIA’s IDX in London this week.
“The key point is to ensure that between now and the final tiering decision that we have market continuity but again, many things can happen… I don’t see a final tiering decision before the end of this year,” he said.
Concerns were raised over recent consultation papers on compliance, fees, and tiering between CCPs by the European Securities Market Authority (Esma), under the European Market Infrastructure Regulation (Emir) 2.2.
“Emir 2.2, I think you’ve mentioned that the third country CCPs’ supervision was supposed to be the easier or the less controversial part of the three. As an industry participant it was the piece that made us nervous. We’ve heard concerns around market fragmentation,” said Farida El-Gammal, executive director, global clearing regulatory change at JPMorgan.
“We want to ensure that all market participants have access to the opportunity to access CCPs. We feel that there is the risk of, particularly EU clearing firms, clients of EU clearing firms, EU participants, potentially losing access to deep liquidity pools for cleared derivatives in third country jurisdictions if Emir 2.2 particularly around the concept of tiering CCPs is not thread very carefully,” said El-Gammal.
Emir 2.2 introduces an enhanced dedicated regime for third country CCPs.
For Roger Storm, deputy CEO and head of risk operations and business development at Swiss clearing house SIX, the indicators outlined in the consultation for tiering were unclear.
“All of these indicators are at this stage too broad to get a clear idea of which CCPs – of the many that are now active and recognized in the EU – would potentially fall under the tier two category, that is unclear to me,” says storm.
“What would happen to third country CCPs with this regime as it emerges from these consultations, is that the EU effectively introduces two things. Firstly, a form of access charge to the EU, which then raises the financial bar for any third country CCP wishing to provide clearing services for markets inside the EU. It would basically become more expensive to service EU clients, and EU trading venues from outside of the EU.
“And secondly, if you are a significant CCP, that comes with the additional extraterritoriality rules of the EU. That is an additional potential burden for third country CCPs as you will have to make sure that you comply with two sets of legal requirements, not just your national ones, but also the EU ones,” he says.
Important considerations must be made on these consultation papers, as this could potentially impact the way global markets function, according to Storm.
“All third country policy makers have to think through what this means and whether they then require reciprocal rules on their side. And to what extent they can accept them,” he says.
“I hope as many as possible take the time to read the consultation papers and provide feedback to Esma and the commission who will then have the final say on this because it is indeed a long-term change in the market, not just in the EU, and could actually cause a substantial shift in the way global markets work.”
Emir 2.2 was expected to come into force no later than June, however, a delay in the translation of the final agreement, which failed to be signed by the European Parliament’s President has cause further delays in the process, according to Natalie Pettinger Kearney, deputy head, EU regulatory and public affairs group at Freshfields Bruckhaus Derringer.
“The signing of the act won’t take place till later, which means that publication into the official journal is more likely to around mid-November at the earliest, which does leave a significant gap that if this had been happening at any other time in a five year cycle, it probably would have been out by June,” says Kearney.
“We are talking about a delegated act, and there is quite a bit of wiggle room when it comes to delegated acts,” she said. “We are talking about technical standards and how this piece of legislation will work in practice, and there are not supposed to be political measures, but the fact that the commission is in the driving seat, they have this consultation from Esma and technical advice will be given, at the end of the day the commission can decide to ignore whatever Esma comes up with. We are going to have to be quite vigilant.”
Kearney also warned of the impact a change to both the EU’s and the US Commodity Futures Trading Commission (CFTC)’s heads of supervision could potentially have.
“It would be naïve to say that there aren’t very deep and very strong working relationships between the CFTC and the commission, but make no mistake personalities do matter. The fact that the current vice president Dombrovskis is moving away from the commission, it’s the end of the mandate, Giancarlo is moving on as well, those things will have an impact despite very close working level relationships that underpin at political level,” said Kearney.