On April 5, 2016, ESMA published its final report and amending regulatory technical standards on the margin period for Central Counterparty client accounts. The amending RTS change the time horizons for the liquidation period for gross omnibus accounts and individual segregated accounts for exchange traded derivatives and securities. ESMA considers that a CCP, in a liquidation period, should be able to either transfer or liquidate the position of the defaulting clearing member and furthermore, have sufficient margin to cover exposures arising from such transfer or liquidation.
EMIR is proposing to recognize US clearing houses (Derivative Clearing Organizations) if internal rules and procedures satisfy the following requirements: (i) a minimum liquidation period of two days for initial margin is applied to clearing members’ proprietary positions for derivatives contracts executed on regulated markets; (ii) for all derivative contracts, measures are in place to limit procyclicality which are equivalent to the options under EMIR; and (iii) the DCO has sufficient pre-funded available resources enabling it to withstand the default of at least the two clearing members to which it has the largest exposures under extreme conditions.
Following the adoption by the European Commission of an equivalence determination, the US regulatory framework for derivatives clearing organizations supervised by the Commodities Futures Trading Commission is considered equivalent to European standards. In the context of equivalence, one main difference between legal and supervisory arrangements for CCPs in the US is the minimum liquidation period or the margin period of risk in the EU for financial instruments other than for OTC derivatives. US regulations for the minimum liquidation period for US DCOs for financial instruments other than OTC derivatives is one day; the minimum liquidation period under EMIR is two days. As a result, under the current EU system, ESMA concluded that clients of EU CCPs will be required to post more initial margin than they would as clients of a US DCO giving rise to the risk of regulatory arbitrage.
Under the proposed amendment, European CCP’s would have the option to offer both a two day net margin model and a one-day gross margin model. The option of both models provides European CCP’s with the ability to compete on a level playing field with recognized US CCPs. It has been clarified that affiliate positions will not benefit from the new one-day gross account. However, affiliate clearing for these purposes no longer includes so-called “indirect clearing” where a different client ultimately sits behind the transaction. ESMA has submitted the amending RTS to the European Commission for endorsement.
The final report is available at: https://www.esma.europa.eu/press-news/esma-news/emir-esma-proposes-one-daymargin-period-risk-ccp-client-accounts.