Self-reliance and resilience are at heart of the European Commission’s strategy for Europe’s financial system as well as the euro, which is to become a major conduit of the European Union’s influence in global financial markets.
With its proposal for the European Market Infrastructure Regulation 3.0 (EMIR 3.0), the European Commission (EC) aims at increasing the attractiveness of EU central counterparty clearing houses (CCPs), notably by incentivising the relocation of clearing of systemic transactions to the EU and through adjustments to the existing framework.
However, challenges remain to reach the right balance between a sound risk management framework for participants and free access to foreign markets for European intermediaries and their clients.
Securities Services at BNP Paribas provides an overview of the changes included in the proposal for EMIR 3.0 and the challenges they might bring.
New requirements under EMIR 3.0
EMIR 3.0: prescriptive measures
EMIR 3.0 would introduce prescriptive measures that aim at favoring the relocation of clearing in the EU:
- An obligation for eligible financial and non-financial counterparties to have an active account with an EU CCP. This account would be of quantitative nature (i.e., with ratios and/or thresholds). Its calibration would be delegated to the European Securities and Markets Authority (ESMA);
- Prudential requirements in Pillar 2 designed to reduce any “excessive” exposure to systemically important segments of UK CCPs or other third-country CCPs (i.e., EUR Interest Rate Swaps, etc.).
EMIR 3.0: incentives
The proposal for the European Market Infrastructure Regulation 3.0 would also introduce incentives to increase liquidity and the attractiveness of EU clearing and EU CCPs:
- Requirements for Clearing Members and clients providing clearing services to provide information on the possibility to clear via EU CCPs;
- New requirements for Clearing Members and clients providing clearing services to ensure additional transparency and predictability of CCP models towards their clients, with some misalignments still to be addressed;
- A simplification of procedures for the authorisation and recognition of CCPs and for the extension and/or authorisation of activities and services of CCPs;
- The elimination of counterparty risk limits for centrally cleared derivatives for Undertakings for Collective Investment in Transferable Securities (UCITS)
EMIR 3.0: review of existing rules
Existing rules will be reviewed to preserve the attractiveness of clearing in the EU:
- A review of the exemptions from the clearing obligation or bilateral margining: intragroup transactions with a changed mechanism introducing a negative list of specific countries (instead of the current system of equivalence); a permanent exemption for transactions with pension scheme arrangements established in a third country where there is a national exemption from the clearing obligation;
- The addition of bank guarantees and public guarantees as eligible collateral for margin requirements;
- Additional tools to manage the recognition of third-country CCPs (TC CCPs): the possibility for the European Commission to waive the requirement for a third-country to have a regulatory framework equivalent to EMIR for the recognition of TC CCPs and the possibility for ESMA to establish more proportionate cooperation modalities;
- Public entities remain exempted of mandatory clearing of their derivatives activity under EMIR but are “encouraged” to clear via an EU CCP. Also, the analysis and corrective actions to potential barriers which can potentially complicate the transfer of positions from a TC CCP to an EU CCP are delegated to national regulators (accounting rules, etc.).
What is next for EMIR 3.0?
While some of the measures included in the proposal for EMIR 3.0 should be welcomed by the financial sector, others leave little space for industry-driven initiatives or may be considered as excessively restrictive. Policy makers in the EU face the difficult task of designing a regulation that can adequately support financial stability in the EU while taking into consideration the complexities and the geographies of financial markets and protect the competitiveness of EU actors.
Some provisions on bilateral margin requirements are still missing in this EMIR 3.0 proposal. For instance, a permanent exemption for equity options from margin requirements would align the regulatory framework of the Union with other jurisdictions, such as the U.S.
The introduction of a possibility for the Commission to waive some of the requirements to determine equivalence to EMIR is an additional tool which should improve the global access to foreign markets for European intermediaries and their clients. Also, the access to the clearing of cash equity and government bonds in the UK market may be impacted by the temporary nature of the European Commission’s decision on the equivalence of the UK framework to EMIR.
The discussions on EMIR 3.0 have now be taken to the European Parliament and the Member States, which will be looking closely at the potential effectiveness of the proposed measures. The legislative process review should take from 12 to 18 months.