EFAMA, BFPI Ireland, EACB, FIA EPTA, Federation of the Dutch Pension Funds, Finance Denmark, Nordic Securities Association, AIMA, ICI Global, FIA and ISDA support positive incentives to further enhance the attractiveness of EU clearing and EU capital markets, including many of the measures proposed in EMIR 3.0[1].
However, further efforts should focus on streamlining the supervisory framework for EU central counterparties (CCPs) across member states while making the EU CCP offering for clearing in the EU more attractive and innovative. We believe that incentivizing measures would provide a path to sustainable growth of EU CCPs while maintaining competitive and open markets. Any measures to increase the attractiveness of EU clearing should be guided by the principle of supporting EU financial stability, facilitating client choice on where to clear and protecting the international competitiveness of EU market participants.
The post-crisis Group-of-20 reforms to the over-the-counter derivatives markets, implemented in the EU through the European Market Infrastructure Regulation (EMIR), have made derivatives markets safer. It is important to build on the progress made and not introduce policies that would disrupt and fragment the global clearing ecosystem. Fostering a proportionate regulatory framework, to the benefit of all participants, will promote increased liquidity and clearing volumes in the EU. However, the proposed active account requirement (AAR) would negatively impact EU capital markets by introducing fragmentation and loss of netting benefits and make the EU less resilient to market stresses, with no benefit to EU financial stability.
Furthermore, the AAR will create a competitive disadvantage for EU firms compared to third-country firms, which will remain able to transact in global markets without restriction. The introduction of quantitative thresholds in the AAR is especially damaging and could lead to a large, volatile and unpredictable price difference between CCPs (called a basis), which would significantly increase the cost and risk of hedging for EU clients. Ultimately, it would harm European pension savers and investors.
Regulatory and supervisory co-operation is a critical component of any cross-border market. Interest rate swaps, metals, energy and other derivatives are traded in global markets. We believe EMIR 2.2 already provides European authorities with effective tools to supervise and oversee systemically important third-country CCPs (Tier 2 CCPs).
The EMIR 3.0 proposal aims to mitigate financial stability risks arising from third-country CCPs, and yet does not adequately address the ESMA recommendations from its 2021 assessment of systemically significant CCPs. Critical areas in which to enhance supervisory cooperation with third-country authorities, such as recovery and resolution planning and an enhanced cooperation framework, particularly during times of market stress, could be further developed in the EMIR 3.0 proposal.
A location requirement for market participants would make the EU one of the only advanced capital markets with such a policy. By contrast, US clearing participants are significantly exposed to Tier 2 CCPs, since the majority of US-dollar-denominated interest rate swaps are cleared outside the US. The fact that US authorities have not sought to impose a location policy suggests that most jurisdictions believe central clearing markets are global by nature and financial stability risks are best managed through a solid shared oversight framework between supervisors.
Finally, the proposed AAR severely challenges the principle of best execution toward the end client. EU clients that are required to clear on an EU CCP to comply with the AAR threshold will be forced to accept an uncompetitive price wherever the price available at an EU CCP is higher than what is available at a Tier 2 CCP, while their third-country competitors will enjoy the freedom to trade at the best available price.
When making important policy decisions, such as imposing an AAR, policymakers should act prudently and be guided by comprehensive and robust cost-benefit assessments that include a review of the risks and impacts on financial stability and on the competitiveness of EU market participants, as well as an analysis of the current balance of hedging interests in the EU market. To date, such a comprehensive and robust cost-benefit assessment has not been produced.
We therefore strongly recommend the deletion of the proposed active account requirement.
[1] For example, simplification of procedures for CCPs to launch products and change models, changes to collateral requirements, changes to participation requirements for non-financial counterparties, removal of the need to have an equivalence decision as a prerequisite to benefit from intragroup transaction exemption, etc
