On November 15, the European Securities and Markets Authority (ESMA) published an opinion (Opinion) under the European Market Infrastructure Regulation (EMIR). The Opinion is designed to promote a common supervisory approach in relation to: (1) new products and services offered by central counterparties (CCP) that require regulatory approval under Article 15 of EMIR; and (2) the meaning of “significant changes” under Article 49 of EMIR.

Article 15 of EMIR requires CCPs wishing to extend their business to additional services or activities not covered by their initial authorizations to submit an extension request to their relevant national regulators. The Opinion clarifies that “additional services or activities” in this context includes any service or activity:

  • that exposes the CCP to new or increased risks;
  • in respect of classes of financial instruments that have differing risk profiles or differences to the products cleared by the CCP; and
  • in respect of classes of financial instruments not covered by the CCP’s authorization.

The Opinion also sets out a list of non-exhaustive indicators for regulators to consider when determining if a CCP’s current authorization covers the proposed additional service or activity. The indicators include where the CCP needs to: (1) amend or create a new risk management framework; (2) adjust its capital by more than 10 percent; (3) change its operational structure; or (4) adopt new or different methods to obtain prices, among others.

Article 49 of EMIR requires CCPs to review the models and parameters used to calculate their respective margin requirements, default fund contributions and collateral requirements. It also requires CCPs to perform stress tests and back tests on the models, and states that CCPs must obtain independent validation, inform ESMA and their national regulator of the test results and obtain their validation prior to adopting any significant changes to their models. The Opinion sets out a non-exhaustive list of indicators which regulators should consider when determining if a change to a CCPs models and parameters is “significant”. These indicators include where the change: (1) introduces a new set of eligible collateral with a different credit or liquidity risk profile; (2) may require the development of new stress scenarios; and (3) results in an adjustment of pre-funded financial resources or capital, among others.

The Opinion can be found here.