EUROPEAN COMMISSION Brussels, 7.12.2022 COM(2022) 696 final COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE A path towards a stronger EU clearing system





COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE A path towards a stronger EU clearing system

1.Introduction A safe, robust and competitive clearing ecosystem in the EU is essential for a well-functioning Capital Markets Union (CMU). Central clearing supports trading in capital markets: when trades are cleared centrally, a central counterparty (CCP) interposes itself between the parties to a trade and becomes the buyer to every seller and the seller to every buyer, guaranteeing the performance of the contracts. It can do so thanks to a system of guarantees that it collects from the parties. Through clearing, each party has a single net exposure to the CCP instead of a complex network of bilateral exposures to individual counterparties. In this manner, CCPs increase market transparency and efficiency as well as reduce the risks in financial markets, especially for derivatives. CCPs play a key role in the clearing ecosystem, which includes both entities that participate directly in CCPs (as “clearing members”), such as large banks and investment firms, and entities that participate in CCPs indirectly (i.e. through clearing members), such as investment funds, smaller banks, insurance companies, corporates. If clearing does not function efficiently, financial institutions, companies and investors face more risks and higher costs. EU rules for clearing and CCPs are set out in the European Market Infrastructure Regulation (EMIR), complemented by the Regulation establishing a framework for the recovery and resolution of CCPs. EMIR provides a strong framework for risk management and transparency in clearing markets. However, new challenges have arisen. First, clearing capacity is an important dimension of the CMU: that is why the EU needs a competitive and modern clearing system. The CMU is about building deep and liquid EU capital markets that can serve the needs of EU citizens, businesses and financial institutions. The Commission continues to implement the 2020 CMU Action Plan. Alongside this Communication, the Commission is adopting a legislative proposal to make it less burdensome for companies to list and raise capital on public exchanges (the “Listing Act”). The Commission is also putting forward a proposal to harmonise key aspects of corporate insolvency law, tackling one of the most important obstacles to cross-border investments within the EU. However, a genuine CMU needs to rely on competitive market infrastructures. As part of the CMU, the Commission has already proposed a review of the Markets in Financial Instruments Regulation and of the regulatory framework for central securities depositories. To strengthen the CMU, the EU also needs to reinforce its domestic clearing capacity. Second, the EU clearing ecosystem must be safe and resilient: EU supervision needs to be enhanced to ensure proper monitoring and control of cross-border risks within the EU coming with increased clearing volumes. To build resilience, the lessons drawn from the recent developments in energy markets, with several energy companies facing liquidity issues when using derivatives, need to be taken into account. These developments have illustrated that EMIR has to be enhanced so that the risks to the EU’s financial stability continue to be mitigated in light of new challenges. This means building a safe and robust EU clearing ecosystem, which is able to withstand economic shocks. Such an ecosystem which allows a wide range of participants, including energy companies, to hedge their risks efficiently and safely, to better predict margin calls and hence manage their liquidity needs more effectively. Third, competitive, well-developed and resilient EU CCPs are a pre-condition for the EU’s open strategic autonomy. It is crucial that the EU remains open to global financial markets in order to attract investors and support the global competitiveness of European firms. At the same time, following the withdrawal of the United Kingdom from the EU, the vast amounts of euro-denominated contracts cleared at UK CCPs entail risks for the EU financial stability and for the transmission and conduct of the EU’s monetary policy. Building robust clearing capacity in the EU reduces the risks stemming from excessive exposures to third-country CCPs. To achieve this, on 7 December 2022 the Commission has presented legislative proposals amending EMIR and other pieces of legislation to make the EU a more attractive cost-efficient clearing hub and address potential vulnerabilities. The measures will impact both the supply and the demand of clearing services. They will help to expand the range of clearing solutions on offer from EU CCPs and enhance their liquidity, by incentivising more market participants to clear there. These proposals follow extensive consultations, including with Members of the European Parliament, representatives from the Member States and their authorities, the European Supervisory Authorities (ESAs), the European Systemic Risk Board (ESRB), the European Central Bank (ECB) and the Single Supervisory Mechanism (SSM), as well as a broad range of industry stakeholders. The impacts of these measures do not depend only on making legislative changes, but also on the engagement and commitment by all actors involved, both public and private. Regulators and policymakers can set the conditions for an enhanced clearing landscape in the EU. But ultimately it is for market participants to take up the opportunities offered by regulation. Public authorities in the EU can also play an important role, leading by example and contributing to a safer, more resilient and competitive clearing ecosystem in the European Union. 2.A competitive and modern EU clearing system a.For CCPs CCPs are catalysts of financial stability and need to be able to respond to developments in the markets dynamically. EMIR established a robust framework for central clearing. But certain areas of the current supervisory framework have proven overly complex. The supervisory approval procedures for launching new clearing services and activities by EU CCPs can be unnecessarily long and burdensome, hindering the launch of new products on the market. Changes in CCP risk models face similar challenges. It should not take years to approve a new product, and model changes need to be swift to reflect changing market and economic circumstances. Delays in approvals increase costs and limit the competitiveness of EU CCPs, reducing the attractiveness of the EU as a place to do business. It is imperative, therefore, to remove these obstacles. Key Actions: The legislative proposal amending EMIR introduces new procedures the authorities involved in EU CCP supervision should follow to approve new activities or services that EU CCPs wish to offer, as well as changes in risk models. Documents to be provided by CCPs in their applications are standardised and the length of time to obtain approval is reduced to a few weeks. A new, short procedure for launching new activities and services without material changes to the business model of a CCP is also introduced. These reforms will considerably shorten the time it takes CCPs to bring a product to market or make a substantial model change. EU CCPs are encouraged to make the most of potential opportunities offered by a new framework, including by broadening their product range to meet the demand of their clearing members and clients. b.For financial sector participants Financial participants using the services of CCPs, e.g. investment funds and insurance companies, should also benefit from reduced costs when using clearing services. Following the post-2008 crisis reforms and the move to centralised clearing, adjustments were also made in the banking framework, enabling banks to benefit from a preferential capital treatment when they clear at an authorised or recognised CCP rather than engage in bilateral transactions. This makes sense because CCP clearing reduces counterparty credit risk. These changes to bank prudential rules have not, however, been fully mirrored in other pieces of financial sector legislation. The current rules on counterparty exposure limits for derivative transactions in the UCITS Directive, for example, do not fully reflect the risk-reducing nature of central clearing for investment fund managers. Inconsistencies exist also in the Solvency II framework for insurers. This lack of consistency has become more problematic as EU CCPs have started offering new ways of accessing clearing, which help funds and insurance companies. Under the Solvency II framework, for example, the CCP-related exposures of insurance companies wishing to become direct CCP members can be subject to higher capital requirements than where insurers act as indirect clearing participants. These higher capital requirements are a disincentive to using these new access models. Some EU pension scheme arrangements, which will come under a clearing obligation in June 2023, are starting or have already started using the new access models. The more actors involved in the system, the more liquidity and opportunities are available to transact. Key actions. In addition to the requirement of an active account at EU CCPs (see section 4), the legislative proposals adopted on 7 December 2022 amend the UCITS Directive and the MMF Regulation to better reflect the risk-mitigation role of CCPs authorised in the EU or recognised by ESMA. As regards insurance companies, the Commission intends to address the disadvantageous prudential treatment insurers face if they become a direct clearing member, in the context of the forthcoming revision of the relevant Delegated Regulation.

3.A safe and resilient clearing ecosystem a.Ensuring robust and joined-up supervision Developing the EU clearing ecosystem may lead to additional risks within the EU due to increased clearing volumes. For these risks to be properly managed, EU CCPs must be subject to thorough supervision both at the national and the wider EU level. Indeed, given the central role of clearing in the EU financial system, risks stemming from supervisory failures extend beyond national boundaries. Recent market developments have also confirmed the need for a more holistic risk monitoring and control: CCPs stand in the middle of a complex chain of interdependencies and central clearing is not just the business of CCPs and some large banks, but involves different types of economic actors in different Member States. Recent market developments have highlighted the need for better information on the relationships and interdependencies across the entire clearing chain: even if CCPs are robust, liquidity issues of market participants may result in vulnerabilities which must be identified and addressed. This means that the EU must reinforce the framework for the authorities to work together effectively on the ground, share knowledge and insights and develop a common supervisory culture from the bottom-up. An ecosystem where the monitoring of clearing chains, which run across Member States and markets, involves EU bodies. This is particularly true for emergency situations, where decisions need to be made with the full picture in mind, in the interest of the EU and Member State economies alike. These objectives can be achieved by building on the EU’s current supervisory system. Supervisory arrangements for CCPs were reformed in 2019: while national CCP supervisors retain final responsibility for the supervision of CCPs established on their territory, the role of ESMA has been made stronger by setting up a CCP Supervisory Committee composed of EU CCP supervisors, three independent members and central banks for certain discussions. The Supervisory Committee supervises systemic third-country CCPs, while for EU CCPs its role remains mostly that of promoting convergence. Key actions. The Commission legislative proposal further develops and strengthens the EU supervisory framework, including by: i) establishing joint supervisory teams for certain tasks, to set the basis for more cooperative supervision with a wider EU perspective and to develop supervisory knowledge and experience throughout the EU; ii) facilitating the monitoring of cross-border risks to the EU throughout the clearing chain by EU authorities, such as the ESAs, ECB, ESRB and the SSM; and iii) allowing ESMA, through its CCP Supervisory Committee, to co-ordinate common responses to emergency situations on the basis of up-to-date information. b.A more robust framework for clearing commodity derivatives Commodity derivatives markets allow firms, including energy producers, suppliers and distributors, to manage risks of volatile prices, and offer longer-term fixed contracts to customers. Over the summer, price spikes and extreme volatility in energy derivative markets have led to liquidity issues for energy companies. These market participants have experienced pressures on liquidity because of higher margin calls linked to rising prices. As part of its package of energy emergency measures, the Commission has proposed, for example, to extend the list of assets that can be posted as collateral at EU CCPs. Nevertheless, beyond the emergency measures, recent market developments have already highlighted targeted areas for structural improvements of the EMIR framework. Indeed, the broader implications of recent market dynamics should be carefully looked at, as also suggested by ESMA in a recent letter to the Commission. Hedging of energy exposures has become more challenging for some participants, as commodity price volatility has increased and CCPs have called more margins. In stress scenarios, margins increase, reflecting the higher risks faced by market participants. In this manner, central clearing increases the need to ensure proper liquidity management by all clearing participants, to meet margin calls. In addition, recent market developments have brought the attention to the way non-financial firms, such as corporates, access CCPs, as the liquidity strains may be greater in case a corporate accesses a CCP directly, without the intermediation of a financial clearing member such as a bank. The EU clearing ecosystem should enable EU firms to hedge their risks efficiently and safely, while at the same time safeguarding financial stability. In this way, central clearing can and will support the EU economy. Key actions. The legislative proposal amending EMIR enables firms to get a better understanding of their future potential liquidity needs when clearing centrally by requiring margin models to be more transparent for all: it is easier for a firm to plan liquidity needs if it can understand what sort of margin calls it may face, particularly in a situation of stress. EU CCPs already provide tools that simulate the behaviour of margin models. This information should however be passed on through the clearing chain, as the liquidity needs arising from margin calls do not stop at the level of the clearing member, who will therefore be required to clearly explain to their clients how margin calls work and provide simulations under different scenarios. The legislative proposal amending EMIR also strengthens the requirements for participating in a CCP, to avoid that undue risks spill over to other clearing members. If non-financial firms have direct access to a CCP, they must be better equipped to fulfil their obligations. The legislative proposal also takes into account ESMA’s recommendations to amend the methodology to determine the clearing threshold , making it easier to implement and more predictable. It also requires ESMA to review and clarify the conditions for a transaction to be considered a hedge and therefore not count towards the clearing threshold. 4. A clearing ecosystem supporting the EU’s open strategic autonomy Clearing is a global business, and EU market players are active at several CCPs around the world. The work in the area of CCP equivalence over the last several years clearly shows the commitment of the EU to an open financial system that supports the international standards and cooperation. The Commission has adopted CCP equivalence decisions for more than 20 jurisdictions, which allowed the EU market to open up to more than 40 third-country CCPs. This means opportunities for third-country CCPs and opportunities for EU market participants, which often accompany European firms to foreign markets. At the same time, “open strategic autonomy” means that the EU needs to be able to address risks to financial stability that can arise when EU market participants are excessively exposed to third-country entities, as this can be a source of vulnerability. The United Kingdom, in particular, plays a key role as a hub for central clearing: in the first half of 2021, 91% of all euro-denominated interest-rate swaps trades were cleared in the United Kingdom. To mitigate the risks arising from the potential abrupt interruption of access by EU market participants to the UK CCPs following the withdrawal of the United Kingdom from the EU, the Commission adopted temporary equivalence decisions covering the regulatory and supervisory framework for those CCPs. The current temporary equivalence decision covering the framework for CCPs in the United Kingdom expires on 30 June 2025. At the same time, the Commission has urged EU market participants to reduce excessive exposures to such systemic infrastructures located in a third country, in light of the potential risks in a stress scenario. Indeed, in case of stress, excessive reliance of EU market participants on CCPs established in third countries makes it difficult for EU regulators and supervisors to address the financial stability risks for the EU. As noted by ESMA, in times of crisis, changes to the eligible collateral, margins or haircuts may negatively impact the sovereign bond markets of one or more Member States, and more broadly EU financial stability. Disruptions in key markets relevant for EU central banks’ monetary policies may also hamper the transmission mechanism of those policies. In times of crisis, EU authorities would not be in the driving seat for taking the relevant decisions. It is important to prepare for high-risk but low-probability events. Increasing clearing capacity in the EU and strengthening the clearing ecosystem will reduce the excessive exposures of EU market participants on third-country CCPs in the medium-term, thus supporting the EU’s open strategic autonomy. Key actions. The legislative proposal amending EMIR requires market participants subject to a clearing obligation to clear a portion of the products that have been identified by ESMA as of substantial systemic importance through active accounts at EU CCPs. This will contribute to reduce the financial stability risks posed by excessive exposure to third-country CCPs, as identified by ESMA. To complement this measure, the legislative proposals also amend the Capital Requirements Directive and the Investment Firm Directive to enhance monitoring and treatment of concentration risk that may arise from exposures to CCPs. The Commission is also proposing to simplify the equivalence assessment under EMIR when the risks involved in clearing in a third country are particularly low. Experience has shown that there is room for making the equivalence framework in EMIR more proportionate and to better tailor cooperation with foreign supervisors, based on the different magnitude of risks posed by CCPs in third countries – and without compromising on the need for third countries to have sound rules in place.