On June 13, the European Commission (EC) published a proposed amendment (Proposal) to the European Market Infrastructure Regulation (EMIR) aimed at enhancing the supervision of EU and non-EU based or “third-country” central counterparties (CCPs). The Proposal follows the suggested reforms to EMIR published in May 2017 (for further information, please see the Corporate & Financial Weekly Digest edition of May 5) and the announcement of the Futures Industry Association’s opposition to relocation requirement s for non-EU CCPs (for further information, please see the Corporate & Financial Weekly Digest edition of June 9).
In relation to third-country CCPs, the Proposal introduces a new two-tier system, assigning each third-country CCP a classification based on its systemic importance to EU financial stability. Details as to how the classification will be determined will be published in a delegated act, due to be finalized six months after the Proposal is adopted. Non-systemically important, or “tier 1” CCPs, will continue to operate under the existing EMIR supervisory framework. Systemically important CCPs, or “tier 2” CCPs, will be subject to stricter requirements including:
- compliance with the necessary prudential requirements for EU-based CCPs, while taking into account third-country rules;
- confirmation from the relevant EU central banks that the CCP complies with any additional requirements set by those central banks; and
- the agreement by the CCP to provide the European Securities and Markets Authority (ESMA) with relevant information and allow for on-site inspection of the CCP in the third country.
If ESMA and the relevant central banks deem the above requirements insufficient for the supervision of a third-country CCP due to its systemic importance to the EU, a “tier 2” CCP can be further defined as a “substantially systemically important CCP.” The EC can then, on a recommendation by ESMA and any relevant central banks, adopt an implementing act declaring that such CCP can only provide services in the EU if it is established and authorized in the EU in accordance with EMIR. This provision of the Proposal will likely be of particular significance in the upcoming Brexit negotiations due to London’s strength in Euro clearing; following Brexit the United Kingdom will be a third country, and the UK CCPs will be third-country CCPs for purposes of the Proposal.
The Proposal also introduces a more integrated EU-level approach to EU CCP supervision by creating a new CCP Executive Session within ESMA. The CCP Executive Session will be responsible for ensuring consistent supervision of EU CCPs in different member states, as well as those in third countries.
The Proposal is available here.