Letter to Members of the European Parliament on EMIR review

The European Systemic Risk Board (ESRB) has published a letter addressed at members of the European Parliament in connection with the EU’s currently proposed modifications to the European Market Infrastructure Regulation (EMIR) in an effort to increase the competitiveness of EU central counterparties (CCPs) and to foster clearing activities among market participants.
In its letter, the ESRB greatly appreciates the initiative of the EU, but would like to make aware of several aspects that the regulators should consider in their review of EMIR and thus in the proposed modifications. The key aspects are briefly discussed below:
(1) Active Accounts: The ESRB supports the proposed requirement of financial counterparties to have an active account with an EU CCP and clear at least part of their transactions on derivatives subject to the clearing obligation in this EU CCP. Since this measure would be limited to derivative contracts involving EUR and PLN which are the most important currencies in derivative contracts in the EU, this leaves plenty of space to use other CCPs for derivative contracts denominated in other currencies and – at the same time – ensure a large proportion of derivatives to be cleared by European CCPs. However, the share of activities in an active account that should be required to be cleared by EU CCPs should be determined by supervisory authorities such as ESMA, the European Securities and Markets Authority or the European Central Bank. Hence, this determination should be delegated and should be implemented via a corresponding Delegated Regulation. Additionally, the EU should set a time frame for when such proportion must be reached by counterparties. In this context, the ESRB also notes that the reporting obligation must include the calculation and reporting of global activity for a given category of contracts, so that the overall proportion of account activity for a given category of contracts cleared by an EU CCP can be determined.
(2) Data: The ESRB once again reminds EU regulators of the significance of ACCURATE data for financial market regulators and for participants alike to ensure transparency and an adequate level of oversight over derivative transactions. In this context, the ESRB notes the lack of effort among CCPs and large banking groups in their provision of regulatory reports. The poor quality, so the ESRB, is partly driven by a lack or inadequate internal procedures „for verifying and checking data before they are submitted to the EU authorities“. Therefore, the EU regulators are strongly recommended to enhance the reporting requirements of named market participants to ensure that the data submitted can be used to monitor compliance, e.g. with the active account requirements.
(3) Collateral: The ESRB strongly recommends to limit the use of uncollateralized bank guarantees to non-financial clearing members. In fact, the Board does not consider these guarantees to be sufficiently liquid so as to be considered as adequate collateral for financial counterparties (compared to the liquidity of cash or government bonds). In addition, EU regulators should consider the fact that the use of both collateralized and uncollateralized bank guarantees „increases the interdependencies between banks and CCPs“.
(4) Non-objection procedure: The ESRB strongly welcomes the proposed non-objection procedure for the authorization of activities beyond the current scope of a regulated CCP. However, the Board finds that this non-objection procedure should only be applicable to new clearing activities and contracts that do not involve payment in currencies other than the ones already used in authorized classes of financial instruments. For instruments with new currencies, „dedicated liquidity risk management and payment and settlement arrangements should be established, ensuring that these would not constitute non-material changes“. ´
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As these are only the key aspects addressed by the European Systemic Risk Board, please refer to the original letter for more detailed, comprehensive information. You may particularly want to review Annex A of the letter starting on page 6, which specifies the proposed regulatory amendments to the proposed regulation.