Post-Brexit Euro-Clearing

Back in March this year, we shared our thoughts on Europe’s desire to reduce their exposure of non-EU CCPs (Central counterparty clearing houses) in the clearing of Euro-denominated and Polish Zloty-denominated OTC derivatives; and to increase the attractiveness of EU-based CCPs for market participants.   

To give some idea of how much of this volume is cleared outside of the EU, at the end of 2020, over 90% of Euro-denominated OTC Derivatives were carried out in the UK (source). 

The backdrop to this European central-clearing strategy is a deeper integration of capital markets across all EU member states, i.e. the single Capital Markets Union, or the “CMU”. 

Recently on 7 December, the European Commission proposed a list of legislative revisions to its clearing rules in EMIR.  We have reviewed its communication and have summarised the proposed amendments within the overall EU-clearing strategy: 

Building a competitive clearing service domestically within the EU 

      1. Encouraging innovation at EU CCPs: 

  • A much shorter procedure for regulatory approval of new products, including new risk model changes, will be available to EU CCPs. The approval timeframe could be reduced to 10 working days instead of up to 2 years in some instances today.  A shorter time to market would encourage product innovation and, in turn, clearing capacity at the CCPs. 

 

     2. Providing clearing benefits to more market participants: 

  • Removing unfavourable rules that do not reflect the risk-mitigating nature and preferential capital requirement associated with clearing over bilateral transactions. 
  • Removing the bias for investment advisors, fund managers and insurers via revisions to MIFID Regulations, UCITS Directive and Delegated Regulation. 

Building a safer and more resilient clearing ecosystem across the EU 

     3. Establishing a more joined-up EU-centric supervisory framework for clearing: 

  • Closer cooperative supervision across all EU member states. 
  • Better monitoring of cross-border risks to the EU through multiple EU clearing authorities. 
  • Enabling ESMA, through its CCP Supervisory Committee, to coordinate common responses to emergencies. 

 

     4. Raising specific requirements on those who clear commodity derivatives: 

  • Greater transparency on the margin models enables a better understanding of liquidity needs and spill-over risks within the clearing membership upon a default. 
  • Non-financial firms with direct access to a CCP must understand and be able to fulfil their obligations. 
  • Updates to the methodology to determine the clearing threshold, making it easier to implement and more predictable. 

Reducing exposure to systematic third-country CCPs to clear euro-denominated derivatives 

     5. Clearing participants will be required to maintain active accounts at EU CCPs to clear a portion of the products.  ESMA will define details. 

     6. Concentration risk on supervised entities (credit institutions and investment firms) held at third-country CCPs will be subject to enhanced monitoring.  Measures will include incentives and punitive measures if these risks outside the EU cannot be reduced. 

     7. Equivalence assessment on third-country CCPs will be proportionate to the risks involved. 

Do you want to accelerate your knowledge?  

Margin Reform has a team of expert practitioners experienced in margin reduction, capital conservation and collateral optimisation across both cleared and bilateral markets.   

We are well-versed in a wide range of pre and post-trade solutions and are connected to market-leading clearing houses, top-tier sell-side banks and critical market infrastructures.  

We are ready to support firms navigating the changes to OTC clearing, the regulations, the requirements and their impact.  

Why not call us now to make sure you’re ready? 

+44 (0) 20 3662 8805 | info@marginreform.com | www.marginreform.com