The European Commission proposed measures that would substantially amend its process for the approval of clearinghouses (CCPs) operating outside the European Union that provide services in the EU.

Today, CCPs subject to third-country regulatory oversight can provide their services in the EU after the regulatory and supervisory regime they are subject to is recognized as equivalent by the European Securities and Markets Authority. To date, 28 non-EU-based CCPs have been so recognized, and 12 are pending.

Last week, the EC proposed that non-systematically important third-country CCPs – so-called Tier 1 CCPs – continue to operate under the same equivalency regime going forward. However, CCPs determined to be systemically important by ESMA – so-called Tier 2 CCPs – would be subject to stricter requirements, including (1) prudential requirements applicable to EU CCPs (e.g., capital requirements and business conduct rules); (2) any additional requirements established by relevant EU central banks; and (3) obligations to provide ESMA with relevant information and to submit to on-site examinations, and legal assurance that such obligations are valid in the CCP's third country. These requirements are in addition to those imposed by a CCP’s home regulator.

Finally, if a CCP is determined by ESMA (in agreement with a relevant EU central bank) as “substantially systemically important,” the CCP might be required to locate in the EU and be formally authorized by the appropriate EU member state regulator. A CCP might be designated as substantially systemically important if “the additional requirements for systemically-important CCPs are insufficient to mitigate the potential risks.”

My View: The EC proposal seems principally directed at UK-based CCPs that handle substantial products denominated in Euros or other EU member state currencies in anticipation of Brexit. However, the proposal seems sufficiently open-ended to worry all significant CCPs worldwide that are utilized substantially by EU-based entities. According to the EC, EU rules "...on equivalence and recognition have demonstrated certain shortcomings as regards ongoing supervision in third countries, meaning that EU authorities may not become aware of new or growing risks to the EU financial system. Furthermore, the actions of a third-country CCP can have an impact on the financial stability of the EU and its Member States and therefore raise significant concerns for EU central banks." To me this sounds like a desired outcome in search of a justification. However, protectionism is a bad idea no matter which jurisdiction implements it.