ESRB Letter to the European Parliament – background information on the proposal to introduce an active account requirement

The European Systemic Risk Board, ESRB, has published an open letter addressed at the European Parliament, the European Commission, and the Council to provide further insights into the active account requirement (AAR) under proposed EMIR 3.0. To recall, the active account requirement would require EU market participants to maintain active accounts at EU central counterparties (CCPs) for central clearing purposes for derivative contracts identified as having substantial systemic importance. These contracts would primarily include interest rate derivatives in euro and Polish zloty, STIR derivatives in euro, and CDS in euro. Proposed EMIR 3.0 does not specify the exact proportion of transactions to be cleared through these accounts, leaving the definition to be set in a level 2 act. Proposed EMIR 3.0 would also provide for an exemption from EU-CCP clearing obligations for market-making and client clearing activities.
In its letter now, the ESRB presents the findings from an analysis of derivative transactions over the past few years and the clearing ecosystem overall in view of the potential effects of the introduction of an AAR and in view of defining adequate transaction thresholds to help lawmakers make a well-funded decision in this matter. The following summary briefly describes those key findings and the Board’s final view on the issue.
#### Key findings
– The analysis of the ESRB shows that interest rate instruments denominated in euro and Polish zloty cleared at LCH Ltd and STIR derivatives in euro cleared at ICE Clear Europe are instruments of substantial systemic importance.
– The amount of notional outstanding in the clearing market is subject to frequent rebalancing, making notional amounts a poor measure of exposures and risks, especially for market-making purposes.
– Large banks and clients predominantly clear notional amounts at LCH Ltd., and notional outstanding is concentrated among a few clearing members and clients. Shifting clearing volumes to Eurex would require the participation of these institutions and clients.
– The implementation details of an AAR are crucial. The scope of trades covered and the frequency of calculation can significantly affect its effectiveness. Excluding market-making volumes or using infrequent calculations may also limit its impact for shifting risks and exposures from UK CCPs.
In conclusion, the ESRB finds that an AAR could enhance EU clearing capacity and reduce financial stability risks. If based on exposures to third-country CCPs, it could address a broader set of risks, but monitoring compliance would require estimating transaction contributions to overall exposures. Regardless of the approach taken by the regulators, it is clear that EU supervision would need to be strengthened to monitor implementation and to monitor increased clearing activity at EU CCPs.