The German Investment Funds Association (BVI Bundesverband Investment und Asset Management e.V. – BVI) welcomes the European Commission’s proposal to enhance the supervisory arrangements for EU and third-country Central Counterparties (CCPs) in the interest of further market integration, financial stability and a level-playing field.
In its statement, the BVI supports the proposal to enhance the power of the European Securities and Markets Authority (ESMA) and the relevant national Central Banks (NCB) in the EU to supervise EU and third-country CCPs.
It supports the possibility to apply legal and supervisory arrangements allowing ESMA and the Commission to reject the recognition of a third-country CCP if such a clearing house is of such substantially systemic importance that compliance with the obligations laid down in Article 25 para 2 (b) EMIR does not sufficiently ensure financial stability in the EU. Such systemically important CCPs should apply for recognition within the EU in accordance with Article 14 EMIR.
According to the BVI equivalence-based recognition of third-country CCPs would not suffice since the existing EU supervisory framework concerning the third-country CCPs under the EMIR regime was never developed to cope with systemically important non-EU CCPs active in Euro clearing. The current supervisory EMIR-framework provided the EU authorities (e.g. ESMA, European Central Bank and the national competent authorities (NCA)) and NCBs with limited tools for obtaining and accessing information in order to analyse and aggregate the CCP’s and their members’ counterparty risk exposures for euro-denominated clearing of derivatives. Under an equivalence regime, in the event of a financial crisis, the BVI argues that the EU authorities would need to rely on information provided by the third country NCA and/or the NCB on the CCP and their members’ counterparty risk exposures. Furthermore, in an event of a third-country CCP default, only its Central Bank could provide emergency liquidity assistance. The BVI notes that the ECB and their members do not have legal powers to provide such liquidity facilities and would need to rely on the willingness of the NCB of the third country to allocate such liquidity resources to the CCP. Most importantly, the BVI adds that the EU regulators do not have direct supervisory powers with respect to third country systemically-important CCPs to take any action necessary in order to preserve the safety and financial stability of the Euro, the Eurozone and ultimately the EU.
The BVI asserts that Euro-clearing within the EU will be beneficial in the long-run, since in the course of time the clearing of euro-denominated derivatives may have a positive netting effect on the initial margin and therefore reduced costs, for instance in the case of netting between euro-denominated exchange traded interest swaps and euro-denominated OTC interest rate derivatives within the same CCP compared to cross-currency netting efficiencies.