The European Securities and Markets Authority has published a final report on the 2018 survey it conducted on central counterparties' membership criteria and due diligence practices, together with an update to its Q&As providing guidance on the correct implementation of the European Markets Infrastructure Regulation. The survey was prompted by the default in September 2018 of an individual who was acting as a clearing member of Nasdaq Clearing AB. This triggered ESMA's investigation into CCPs' membership and due diligence practices and their compliance with participation requirements under EMIR and the joint Principles for Financial Market Infrastructures issued by the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions.
The Final Report sets out the results of ESMA's survey, which covered all 16 EU-authorized CCPs. It found that no EU CCP currently has an individual acting as a clearing member and that 12 CCPs prohibit individuals from acting as such. Four CCPs currently do not rule out the possibility. While ESMA found that it could not prohibit individuals from becoming clearing members on the basis of the legal provisions set out under EMIR and the Settlement Finality Directive, it did choose to include clarification in its EMIR Q&As on whether a CCP can accept an individual as a clearing member. The Q&As now make clear that although an individual can become a clearing member, they must satisfy the same requirements as any other clearing member with regards to capital requirements, auditing of financial accounts, operational capacity, connection to relevant CCP and payment systems and banking and contingency arrangements. The Final Report also found that seven CCPs allowed Non-Financial Counterparties to act as clearing members. CCPs managed the risk accompanying such clearing members by either restricting NFCs' access to a specific membership model that contains the risk (e.g. through restricted access to clearing services or increasing the cost of clearing) or by allowing NFCs to use the same membership model as FCs but also requiring them to comply with the same stringent FC obligations.
The Final Report also describes the six major practices adopted by CCPs to conduct due diligence on clearing members as: (i) classifying clearing members by their internal credit score; (ii) utilizing an alert service to notify CCPs of any changes in the solvency of their clearing members; (iii) reporting end-of-day and intraday position checks to enable clearing members to anticipate margin calls; (iv) annual due diligence questionnaires to be completed by clearing members, confirming details of membership requirements and any changes to members' arrangements; (v) onsite due diligence checks; and (vi) regularly meeting with clearing members to review governance arrangements and risk policies.