EUROPEAN COMMISSION Brussels, 7.12.2022 SWD(2022) 697 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT REPORT

Accompanying the documents Proposal for a

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

amending Regulations (EU) No 648/2012, (EU) No 575/2013 and (EU) 2017/1131 as regards measures to mitigate excessive exposures to third-country central counterparties and improve the efficiency of Union clearing markets



and



Proposal for a

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

amending Directives 2009/65/EU, 2013/36/EU and (EU) 2019/2034 as regards the treatment of concentration risk towards central counterparties and the counterparty risk on centrally cleared derivative transactions {COM(2022) 697 final} - {SEC(2022) 697 final} - {SWD(2022) 698 final}



Table of contents 1.Introduction 2.Economic, Political and legal context 2.1.Economic context 2.2.Legal context 2.3.Political context 2.4.Consultative process 3.Problem definition 3.1.What are the problems? 3.1.1.Supply side problems 3.1.2.Demand side problems 3.1.3.Insufficient consideration of cross-border risks 3.2.What are the problem drivers? 3.2.1.Complex, lengthy, and burdensome procedures 3.2.2.Limited participation in EU CCPs and concentration in incumbent CCPs 3.2.3.Interconnectedness of EU financial system 3.2.4.Inefficient framework for supervisory cooperation 3.3.How likely is the problem to persist? 3.3.1.Limited attractiveness of EU CCPs and over-reliance on non-EU CCPs

3.3.2.Risks to EU financial stability 4.Why should the EU act? 4.1.Legal basis 4.2.Subsidiarity: Necessity of EU action 4.3.Subsidiarity: Added value of EU action 5.Objectives: What is to be achieved? 5.1.General objectives 5.2.Specific objectives 6.What are the available policy options? 6.1.What is the baseline from which options are assessed? 6.2.Description of the policy options 6.2.1.Improve the attractiveness of EU CCPs 6.2.2.Encourage clearing in EU CCPs 6.2.3.Enhance the assessment and management of cross-border risks 6.3.Options discarded at an early stage 7.What are the impacts of the options and how do they compare? 7.1.A - Measures to improve the attractiveness of EU CCPs 7.1.1.Option A2 – Simplify the procedures for launching products and changing models and parameters 7.1.2.Option A3 – Introduce an ex-post approval/non-objection procedure/review for certain changes 7.1.3.Option A4 – Combination of Options A2 and A3

7.1.4.Choice of preferred option. 7.2.B - Measures to encourage clearing in the EU 7.2.1.Option B2 - Limit/dis-incentivise banks’ excessive exposures to CCPs 7.2.2.Option B3 – Active account at EU CCPs 7.2.3.Option B4 – Broaden the scope of clearing participants, i.e. public entities 7.2.4.Option B5 – Facilitate clearing by clients 7.2.5.Option B6 – Combination of all options 7.2.6.Choice of preferred option 7.3.C - Measures to enhance the assessment and management of cross-border risk 7.3.1.Option C2: Targeted amendments to current supervisory framework 7.3.2.Option C3: Centralise EU CCP supervision 7.3.3.Choice of preferred policy option 8.Preferred options 8.1.Summary of the preferred package 8.2.Combined impacts 8.2.1.Overall impact of the package on relevant stakeholders 8.2.2.Impact on financial stability 8.2.3.Impact on small and medium sized enterprises 8.2.4.Social and environmental impact 8.2.5.Impact on the EU budget

8.3.REFIT (simplification and improved efficiency) and application of the ‘one in, one out’ approach 9.How will actual impacts be monitored and evaluated? Annex 1: Procedural information Annex 2: Stakeholder consultation Overview of Respondents Summary of Key Messages Annex 3: Who is affected and how? Annex 4: Analytical methods Annex 5: Tables and figures Annex 6: Options discarded at an early stage Annex 7: Background 1.The over-the-counter (OTC) derivatives market 2.Clearing 3.CCPs are vital infrastructures for the financial system 4.Clearing in the EU 4.1.Increasing volumes of clearing 4.2.Concentrated and integrated CCP landscape 4.3.Big differences in product offerings 4.4.Liquidity





Glossary Term or acronym Meaning or definition Authorised CCP/ EU CCP A CCP established in a Member State and authorised under Regulation (EU) No 648/2012. BCBS The Basel Committee on Banking Supervision is the primary global standard setter for the prudential regulation of banks and provides a forum for regular cooperation on banking supervisory matters. Its 45 members are central banks and bank supervisors from 28 jurisdictions. CBI Central Bank of Issue CCP Central Counterparty CDS Credit Default Swaps CEA The Commodity Exchange Act regulates the trading of commodity futures in the US. Central clearing The process by which a CCP establishes positions, including the calculation of net obligations, and ensures that financial instruments, cash, or both, are available to secure the exposures arising from those positions. Central Counterparty (CCP) A legal person interposing itself between the counterparties to contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer. CFTC The Commodity Futures Trading Commission is an independent agency of the US government that regulates US derivatives markets. Clearing The process of establishing positions, including the calculation of net obligations, and ensuring that financial instruments, cash, or both, are available to secure the exposures arising from them. Clearing member/direct participant An undertaking, typically a large internationally active bank, which participates in a CCP and is responsible for discharging the financial obligations arising from that participation. Clearing obligation/central clearing obligations The process by which ESMA determines that certain market participants should clear certain types of OTC derivatives in an EU CCP or in a third-country CCP recognised by ESMA. Clients Clients are clients of clearing members, e.g. hedge funds, pensions funds, investment funds, banks, insurance firms, etc. who use clearing members to help clear in a CCP. CMU Capital Markets Union Collateral An asset or third-party commitment that is used by the collateral provider to secure an obligation to the collateral taker. Collateral arrangements may take different legal forms; collateral may be obtained using the method of title transfer or pledge. Counterparty credit risk The risk that a counterparty will not settle an obligation for full value, either when due or at any time thereafter. Credit risk includes pre-settlement risk (replacement cost risk) and settlement risk. CPMI The Committee on Payments and Market Infrastructures is an international standard setter that promotes, monitors and makes recommendations about the safety and efficiency of payment, clearing, settlement and related arrangements, thereby supporting financial stability and the wider economy. The CPMI also serves as a forum for central bank cooperation in related oversight, policy and operational matters, including the provision of central bank services. Credit risk The risk of a change in value due to actual credit losses deviating from expected credit losses due to the failure to meet contractual debt obligations. Credit risk comprises default and settlement risk. Credit risk can arise on issuers of securities (in a company’s investment portfolio), debtors (e.g. mortgagors), counterparties (e.g. derivative contracts or deposits) and intermediaries, to whom the company is exposed. CRR Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 DCO Derivatives Clearing Organization EMIR 'European Markets Infrastructure Regulation', short for: Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories EBA European Banking Authority EIOPA European Insurance and Occupational Pensions Authority ESAs European Supervisory Authorities (i.e. EBA, ESMA, EIOPA) ESCB European System of Central Banks ESMA European Securities and Market Authority FTE Full time equivalent IRD Interest rate derivatives are financial instruments which value is linked to the movements of an interest rate reference. They may include futures, options, or swaps contracts. Interest rate derivatives are often used as hedges by institutional investors, banks, companies, and individuals to protect themselves against changes in interest rates, but they can also be used to speculate on the evolution of interest rates. IRS An interest rate swap is a forward contract in which one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps usually involve the exchange of a fixed for a floating rate, or vice versa, to reduce or increase exposure to fluctuations in interest rates or to obtain a marginally lower interest rate than would have been possible without the swap. Implementing Technical Standards (ITSs) Implementing technical standards are adopted by means of an implementing act pursuant to Article 291 of the Treaty on the Functioning of the European Union (TFEU). ESMA, as the other ESAs, may be entrusted with preparing draft ITSs to be subsequently adopted by the Commission pursuant to the procedure set out in Article 15 of the ESMA Regulation (Regulation (EU) No 1095/2010). FSB The Financial Stability Board is an international body that monitors and makes recommendations about the global financial system. It promotes international financial stability; it does so by coordinating national financial authorities and international standard-setting bodies as they work toward developing strong regulatory, supervisory and other financial sector policies. It fosters a level playing field by encouraging coherent implementation of these policies across sectors and jurisdictions. Policies developed in the pursuit of these objectives are implemented by jurisdictions and national authorities. IOSCO The International Organization of Securities Commissions is an association of regulators of the world's securities and futures markets. Members are typically primary securities and/or futures regulators in a national jurisdiction or the main financial regulator from each country. Its mandate is to: develop, implement, and promote high standards of regulation to enhance investor protection and reduce systemic risk; share information with exchanges and assist them with technical and operational issues; establish standards to monitoring global investment transactions across borders and markets. Level 1 act The term Level 1 act refers to Directives and Regulations adopted by the European Parliament and Council on the basis of a Commission proposal. Level 2 act Many level 1 regulations and directives in the area of financial services (so called ‘basic acts’) contain empowerments for level 2 measures to be adopted by the Commission by means of delegated acts or implementing acts. Delegated acts, as defined in Article 290 TFEU, are acts supplementing or amending certain non-essential elements of a basic act. Implementing acts, as defined in Article 291 TFEU are to be used where uniform conditions for implementing basic acts are required. Where the level 2 measures require the expertise of supervisory experts, it can be determined in the basic act that these measures are technical standards based on drafts developed by the European Supervisory Authorities (see also the terms Regulatory Technical Standards and Implementing Technical Standards). Legacy trades Transactions entered into before a given date, typically the entry into force of a Regulation or a given (new) provision. Margin (initial/variation) An asset (or third-party commitment) accepted by a counterparty to ensure performance on potential obligations to it or cover market movements on unsettled transactions. ‘Initial margin’ means margins collected by the CCP to cover potential future exposure to clearing members providing the margin and, where relevant, interoperable CCPs in the interval between the last margin collection and the liquidation of positions following a default of a clearing member or of an interoperable CCP default. ‘Variation margin’ means margins collected or paid out to reflect current exposures resulting from actual changes in market price. National competent authority (NCA) The authority/ies designated by each Member State in accordance with Article 22 of EMIR tasked with the authorisation and supervision of EU CCPs established in that Member State. Non-Financial Counterparty (NFC) An EU undertaking that is not a CCP or a financial counterparty, as defined in EMIR, Article 2(9). The requirements vary depending on the profile of a NFC. In determining whether an NFC should be subject to the clearing obligation, EMIR considers the purpose for which that NFC uses OTC derivative contracts as well as to the size of the exposures that it has in those instruments. NFCs are subject to the clearing obligation and risk mitigation techniques requirements where their positions in non-hedging OTC derivatives exceed certain thresholds defined by ESMA. These NFCs are known as 'NFC+' as opposed to NFCs below the threshold which are known as 'NFC-'. OTC "Over-the-counter" can be used to refer to stocks that trade via a dealer network as opposed to on a regulated market. It also refers to debt securities and other financial instruments such as derivatives, which are traded through a dealer network. OTC derivative A derivative contract the execution of which does not take place on a regulated market as within the meaning of Article 4(1)(14) of Directive 2004/39/EC or on a third-country market considered as equivalent to a regulated market in accordance with Article 19(6) of Directive 2004/39/EC. PSA Pension Scheme Arrangement Recognised CCP A third-country CCP that has been recognised by ESMA in accordance with the procedure and the requirements laid out in EMIR, Article 25. Regulated market A multilateral system operated and/or managed by a market operator, which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments – in the system and in accordance with its non-discretionary rules – in a way that results in a contract, in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorised and functions regularly and in accordance with Title III of Directive 2014/65/EU; Regulatory Technical Standards (RTSs) Regulatory Technical Standards are adopted by the Commission by means of a delegated act pursuant to Article 290 of the Treaty on the Functioning of the European Union. ESMA, as the other ESAs, may be entrusted with preparing draft RTSs to be subsequently adopted by the Commission pursuant to the procedure set out in Articles 10 to 14 of the ESMA Regulation (Regulation (EU) No 1095/2010). SSM The Single Supervisory Mechanism refers to the EU system of banking supervision. It comprises the ECB and the national supervisory authorities of the participating countries. EU banking supervision is one of the two pillars of the EU banking union, along with the Single Resolution Mechanism. STIR futures Short-term interest rate derivatives Systemic risk The risk that the inability of one participant to meet its obligations in a system will cause other participants to be unable to meet their obligations when they become due, potentially with spill over effects (e.g. liquidity or credit problems) threatening the stability of or confidence in the financial system. That inability to meet obligations can be caused by operational or financial problems. Third-country CCP A CCP established outside of the EU. Tier 1 CCPs Recognised third-country CCPs that have not been determined as Tier 2 CCPs by ESMA. Tier 2 CCPs Recognised third-country CCPs that have been determined by ESMA, pursuant to Article 25(2a), to be, or likely to become, of systemic importance to the financial stability of the EU or one or more of its Member States. Tier 2 CCPs have to comply with certain EMIR requirements and are supervised by ESMA. Trade repository (TR) Trade repositories centrally collect and maintain the records of derivatives under Regulation EU No 648/2012 (EMIR). TRs also centrally collect and maintain records of securities financing transactions (SFTs) under Regulation No 2015/2365, on transparency of securities financing transactions and of reuse and amending EMIR (SFTR). TFEU Treaty on the Functioning of the European Union



1.Introduction This impact assessment concerns a review of the European Market Infrastructure Regulation (EMIR). EMIR regulates derivatives transactions, including measures to limit their risks through central counterparties (CCPs). It was adopted in the wake of the 2008-2009 financial crisis to promote financial stability and to make markets more transparent, more standardised, and thus safer. Similar reforms were implemented in most G20 countries. EMIR requires that derivatives transactions are reported to ensure market transparency for regulators and supervisors; and that their risks are appropriately mitigated through centrally clearing at a CCP or exchanging collateral, known as ‘margin’, in bilateral transactions. CCPs and the risks they manage have grown considerably since the adoption of EMIR. The EU subsequently adapted the banking rules on counterparty credit risk in the Capital Requirements Regulation to grant a preferential capital treatment to exposures to CCPs, reflecting the risk-reducing role of CCPs. Rules on counterparty risk also exist in the frameworks for investment funds and insurance companies, however these were not adjusted to fully reflect the role of CCPs. In 2017, the Commission published two legislative proposals amending EMIR, adopted by the co-legislators in 2019. EMIR REFIT recalibrated some of the rules to ensure their proportionality, while ensuring financial stability. Acknowledging the emerging issues related to the increasing concentration of risks in CCPs, in particular third-country CCPs, EMIR 2.2 revised the supervisory framework and set out a process for assessing the systemic nature of third-country CCPs by the European Securities and Markets Authority (ESMA) in cooperation with the European Systemic Risk Board (ESRB) and the central banks of issue. EMIR is complemented by the CCP Recovery and Resolution Regulation, adopted in 2020, to prepare for the unlikely – though massively impactful - event that an EU CCP faces severe distress. Financial stability is at the core of these pieces of EU legislation. This impact assessment should be put in this context. Since 2017, concerns have been repeatedly expressed about the ongoing risks to the EU financial stability arising from the excessive concentration of clearing in some third-country CCPs, notably in the United Kingdom, in a stress scenario. To avoid cliff edge effects related to the withdrawal of the UK from the EU, the Commission adopted a series of equivalence decisions to maintain access to UK CCPs. Therein, the Commission called on market participants to reduce their excessive exposures to systemic CCPs outside the EU. This was reiterated in the Communication on open strategic autonomy in January 2021. But challenges persist to reduce those exposures. These aspects also emerged in the report on the systemic importance of UK CCPs published by ESMA in December 2021 (henceforth “the 2021 ESMA report on UK CCPs”). That report concluded that some services provided by those CCPs were of such substantial systemic importance that the existing EMIR 2.2 framework could be insufficient to manage the risks to EU financial stability. It, however, underlined that the costs of requiring those services to be relocated to the EU would, at present, outweigh the benefits. In addition, a Member of the ECB Executive Board expressed the view that financial markets are more stable when market participants have options for where to clear, and there is room for the EU to further develop its clearing system. The issues identified in this impact assessment affect EU financial stability by obstructing the reduction of excessive exposures to systemic CCPs and constitute a significant impediment to developing an efficient and competitive EU clearing market, a cornerstone of a deep and liquid Capital Markets Union (CMU). Risks to financial stability stemming from excessive exposures to third-country entities are a source of vulnerabilities for the EU market and affect the EU’s open strategic autonomy. A robust clearing alternative within the EU supports the resilience of EU financial markets and contributes to global financial stability, by broadening the clearing options available. As the Commission stated in its Communication on open strategic autonomy, “the EU is open to global financial markets but it is ready to protect its interests”. The need to address the risks to EU financial stability due to the EU’s overreliance on third-country CCPs was also recognised by the Council, which supported “current work from the Commission to assess and tackle such excessive reliance, e.g. on third-country central counterparties clearing derivatives”. At the same time, addressing these issues and facilitating clearing in the EU entails ensuring that the supervisory framework for EU CCPs is sufficient to manage the risks associated with the interconnectedness of the EU financial system and increasing clearing volumes. Important cross-border risks and their implications for the wider financial system could be overlooked under the current arrangements. These risks could be further amplified as EU clearing markets grow. Moreover, the current complex and burdensome supervisory system limits the attractiveness of EU CCPs. This impact assessment assesses the need to address the potential financial stability risks to the EU due to the continued overreliance on systemic non-EU CCPs and the options to reduce identified risks and vulnerabilities by building a more attractive and robust EU clearing market, which will in turn strengthen the CMU. It analyses options to address: supply-side issues, caused by excessive compliance costs limiting EU CCPs’ ability to compete and a lack of capacity, notably in the range of products offered; demand-side issues, i.e. limited liquidity and network efficiencies; and the insufficient consideration of cross-border risks. Addressing these issues, thereby improving the attractiveness and soundness of EU clearing markets, will enhance the EU’s financial stability. 2.Economic, Political and legal context 2.1.Economic context CCPs interpose themselves between buyers and sellers and, by way of netting and concentration, reduce the overall credit risk in the system. Concentration of OTC derivatives clearing is driven by the nature of the business, with its low marginal cost, economies of scale and a high premium on liquidity – all of which promote the emergence of large market providers. Since the 2008-2009 financial crisis, the market for centrally-cleared derivatives has expanded in a limited number of CCPs resulting in heavy concentration and high levels of interconnectedness, and therefore in new risks, linked to the concentration and interconnectedness of those infrastructures across political and monetary jurisdictions. As of end-June 2021, the outstanding notional of OTC derivatives amounted to EUR 514 trillion, corresponding to 88% of the overall derivatives market. Interest rate derivatives (IRD) represented 80% of outstanding OTC derivatives, of which 60% were cleared through CCPs. At end 2020, UK-based LCH Ltd cleared more than 90% of centrally cleared OTC IRD globally, and more than 80% and 90% of the volume of OTC IRDs denominated in euro and in other EU currencies respectively.The economies of scale (due to netting and diversification benefits) in central clearing lead to significant concentration of the market in a small number of large CCPs. Annex 7 contains information on the role ofand their economic development. The financial resources of such large CCPs are, however, not unlimited. One severe shock could potentially threaten their viability. Their financial soundness is thus essential to ensure the stability of the entire financial system. A CCP could default for various reasons, e.g. operational failures or unforeseen losses following simultaneous defaults of several of its members. The knock-on effects could be far-reaching if the CCP were unable to manage the default within its default waterfall. In addition, large banking groups tend to be clearing members in several CCPs, amplifying the systemic effect of their failure. Problems at a large CCP may spread financial contagion, as all major financial institutions are interconnected via direct and indirect links to CCPs. The cessation of operations of a CCP would deprive market participants of certain basic post-trade functions, entailing the shutdown of entire markets and uncertainty regarding exposures of several market participants with massive knock-on effects. Resolution frameworks, set up to different extents around the world, aim at preserving the continuity of a CCP’s critical functions in case of a crisis, to safeguard financial stability. 2.2.Legal context As seen above, in Section 1.1, the most recent amendment to EMIR aimed at enhancing the supervisory framework for EU and third-country CCPs to ensure EU financial stability, introducing new supervisory arrangements for EU and third-country CCPs.

First, for EU CCPs, national competent authorities (NCAs) continue to have full supervisory powers over CCPs in their Member State, including their ongoing supervision. EMIR has two processes to ensure the cooperation of authorities: consultation of colleges and of ESMA (see Table 3, Annex 5). Colleges were introduced in 2012, bringing together authorities with an interest in CCP operations as voting members or as non-voting members. ESMA has binding mediation powers in certain areas when a negative opinion is adopted. Under EMIR 2.2, the college can also include recommendations in its opinion. Any central bank may “adopt recommendations relating to the currency it issues”. EMIR 2.2 also increased ESMA’s role by empowering it to issue opinions before certain NCA decisions are adopted. The newly established CCP Supervisory Committee (CCP SC) prepares decisions for adoption by the Board of Supervisors and carries out some of ESMA’s tasks for EU CCPs. Experience with the application of the revised EMIR framework has already revealed some shortcomings (see Section 3). A targeted review of EMIR 2.2., in particular on the supervisory arrangements, is required under EMIR (Article 85(7)) by 2 January 2023; this requirement is fulfilled in the context of this initiative. A more comprehensive review of EMIR is required by 2024 under Article 85(1) of EMIR as currently in force. To address the challenges posed by the growing importance of CCPs and improve the preparedness and the tools to handle the potential crisis of an EU CCP, the EU adopted the CCP Recovery and Resolution Regulation in December 2020. Its aim is to ensure that EU CCPs and national authorities have the means to act decisively in a crisis scenario. The Regulation aims to preserve the critical functions of EU CCPs, ensuring financial stability and protecting taxpayers. 2.3.Political context In the context of the CMU Action Plans, efficient and competitive post-trade markets, and clearing in particular, can contribute to creating deeper, more liquid, EU markets as post-trade infrastructures are the foundation stones of capital markets. A more centralised approach to supervision is also aimed for, as it supports convergence and better management of cross-border risks. Those goals are consistent with the EU’s aim for open strategic autonomy and financial stability, while remaining open to global financial markets. As stressed in the Communication “The European economic and financial system: fostering openness, strength and resilience”, the EU has a key interest in developing its financial market infrastructures to ensure financial stability and to avoid excessive reliance on the provision of critical services from third countries. The withdrawal of the UK from the single market and its common system of regulation, coordinated supervision and enforcement, coupled with the significant amount of financial instruments in EU currencies cleared by UK CCPs, create major challenges for EU and Member States’ authorities in managing financial stability, particularly in times of stress. The level of exposure of EU clearing participants to UK CCPs is why, from the start of the process of withdrawal of the UK from the EU, central clearing has been seen a sector where financial stability risks could be significant in the event of an abrupt disruption in access to such CCPs by EU participants. To address such risks in the short term, the Commission adopted, in September 2020, a time-limited equivalence decision for UK CCPs. In this, market participants were urged to take action and reduce their excessive exposures, in particular their OTC derivative exposures denominated in euro and other EU currencies. ESMA was mandated to assess whether a Tier 2 CCP or some of its clearing services could be of such substantial systemic importance that that CCP should not be recognised to provide certain clearing services or activities. In December 2021, ESMA identified three clearing services of substantial systemic importance for the EU or one or more Member States, namely LCH Ltd SwapClear for euro and Polish zloty and ICE Clear Europe for CDS and STIR services for euro products. While the assessment concluded that, at present, the costs of derecognising these services would outweigh the benefits, ESMA identified several measures to possibly address the risks arising from the concentration of certain clearing services of UK CCPs. Among these, ESMA proposed to consider adopting appropriate incentives for reducing the size of EU’s exposures to Tier 2 CCPs, e.g. requirements for alternative clearing arrangements for clearing members or clients and prudential requirements. On 10 November 2021, Commissioner McGuinness made a Statement on the way forward for central clearing, announcing an extension of the equivalence decision for UK CCPs, to avoid the short-term financial stability risks for the EU that an abrupt cut-off from UK CCPs would have put on the EU financial system. It was also acknowledged that time is needed to build clearing capacity in the EU, along with robust supervision, to reduce the EU’s excessive exposures and financial stability risks from the overreliance on UK CCPs, as well as manage risks in the EU. This review follows from this statement, identifying the underlying issues, and considering how obstacles could be addressed. In conclusion, this initiative should be seen in the broader agenda to make EU capital markets more competitive, deeper and resilient, as well as build robust EU clearing capacity to enhance financial stability in the longer term by reducing the risk posed by the excessive exposures towards UK CCPs and the uncertainty related to the protection of the EU interests in times of crisis. 2.4.Consultative process The Commission has engaged in a broad consultation process in the preparation of this initiative, including a targeted consultation, a call for evidence, the establishment of a Working Group on the opportunities and challenges of transferring derivatives from the UK to the EU as well as meetings with Member States, Members of the European Parliament and various stakeholders, e.g. CCPs, clearing members, investment funds, pension funds. In addition, the Commission considered the 2021 ESMA report on UK CCPs and the ESRB’s response to ESMA’s consultation (see Annex 2). Considering the relatively recent entry into force of EMIR 2.2 and the fact that some requirements do not apply yet, it is not considered appropriate to prepare a full back-to-back evaluation of the entire framework. Key areas were identified upfront based on stakeholder input and internal analysis. ESMA’s report provides a detailed assessment of Tier 2 CCPs and an evaluation of the relevant provisions. The identified shortcomings and conclusions drawn in that report served as one of the main considerations for the problem definition and the policy options presented in this impact assessment. Questions to evaluate the current framework were also put forward in other parts of the consultation process. Furthermore, an evaluation considering all aspects of EMIR, is intended to be introduced in the legislative proposal and should take place at least 5 years after application. The evaluation would seek to collect input from all relevant stakeholders, but particularly CCPs, clearing members and clients. Input would also be sought from ESMA as well as national authorities and central banks. Statistical data for the analysis would be sought primarily from ESMA and the ESRB (please see chapter 9 of this impact assessment for further details). During the consultation process, data was repeatedly requested from all stakeholders, including in the targeted consultation. The available quantitative data is however limited for several reasons. First, while supervisors and other authorities may have access to quantitative information on market participants, the Commission does not have access to such data directly or indirectly (via NCAs or central banks). Second, despite the Commission’s efforts to obtain data through the targeted consultation or bilateral meetings, market participants seem hesitant to share it either due to confidentiality concerns (as they may contain business secrets) or because they lack an incentive to do so. This analysis is thus built on practical experience of, amongst others, EU and third-country CCPs, EU and third-country banks, EU and third-country investment firms, EU and national authorities and central banks, and is primarily qualitative in nature. Quantification is provided where data was provided to the Commission services. 3.Problem definition 3.1.What are the problems? Input received from EU and national authorities, as well as market participants, has shown that risks to the EU’s financial stability remain due to the ongoing over-reliance on Tier 2 CCPs. In addition, there is a perceived lack of attractiveness of EU CCPs. More specifically: ·Member States have called on the Commission to act, underlining that the “excessive reliance on third-country critical services providers could create financial stability risks in times of financial market disruption” and that they “supports current work from the Commission to assess and tackle such excessive reliance, e.g. on third-country central counterparties clearing derivatives”; ·National CCP and market supervisors, who sit in the ESMA’s CCP Supervisory Committee and Board of Supervisors, have expressed their concerns in the ESMA 2021 report about the risks stemming from certain clearing services of substantial systemic importance. ·National central banks, via the ESRB, have noted that the reduction in exposures to UK CCPs is essential to ensure financial stability; in addition, national central banks were also consulted prior to the adoption of ESMA’s 2021 report on UK CCPs. Extensive consultation (see Annex 2) has highlighted several issues: supply side issues; demand side issues; and insufficient consideration of cross-border risks. These problems are driven by complex and often burdensome procedures, limited participation in EU CCPs/concentration in incumbent CCPs, the interconnectedness of the EU financial system and an inefficient framework for supervisory cooperation.

Figure 1: Problem tree 3.1.1.Supply side problems While the clearing offer for cash equity market, equity derivatives, bonds or euro-denominated repo meets market participants’ demand, the offer by EU CCPs in some widely used asset classes is not as broad as the one available in some third-country CCPs. The difference in the services provided by EU CCPs and, e.g. UK CCPs, can be seen in several classes of derivatives: interest rate derivatives, credit default swaps, short-term interest rate derivatives (STIR futures) and commodity derivatives (see Annex 7). EU CCPs are hesitant to expand their product offer for two reasons. First, market participants tend to clear in incumbent CCPs. EU CCPs may be hesitant to list additional products if market participants do not commit to using those services. Listing additional products requires IT investments, operational and human resources as well as drafting of methodologies, procedures and risk models. EU CCPs look for reassurance that these development costs will be covered by sufficient demand. But this may not materialise due to the advantage for incumbents in this field – market participants that already clear these products in incumbent CCPs do not have a clear incentive to shift away from them or split their clearing portfolios between several CCPs (See Section 3.2.2). A CCP launching a product already available in another CCP must bring added value for market participants to shift business to that CCP and break the economies of scale and netting efficiencies they benefit from in incumbent CCPs. Second, the regulatory framework and the supervisory arrangements take too long, are complex and uncertain in their outcome for CCPs to bring new products to the market or adapt their models due to the procedures in Articles 15 and 49 of EMIR respectively. Eight respondents to the targeted consultation, mainly CCPs, stressed their concerns regarding the complexity of the regulatory governance and its procedures. Member States generally agreed with these observations and underlined the lack of efficiency of these procedures, which, in addition, increase costs for CCPs and all stakeholders involved in the clearing process (see Section 3.2.1). This limits EU CCPs’ ability to bring new products and models to market, which is important for EU CCPs to compete internationally. For instance, if the time required for EU CCPs to obtain the relevant authorisation to launch a new product is too long and uncertain, market participants may start clearing elsewhere. If clearing members then use a recognised third-country CCP, in which they are already clearing substantially, this could exacerbate the over-reliance on that CCP, in turn creating risks for the EU financial stability (See Section 3.1.3). A CCP’s ability to adapt its models in a reactive and predictable way is also key for market participants when assessing a CCP’s performance and its attractiveness. This leads to a circular problem where CCPs are reluctant to expand their services without the commitment of the demand side, while the market is reluctant to commit to other CCPs due to less netting efficiencies, reduced possibility for margin optimisation and the uncertainty in the time to market of different CCP’s services. 3.1.2.Demand side problems Section 3.1.1 shows the connection between the supply and demand side issues. The lack of demand from clearing members and clients is however compounded by several factors: network effects of continuing to clear at incumbent CCPs and insufficient liquidity in EU CCPs. First, clearing, by nature, favours concentration by providing economies of scale and netting benefits (see Section 2.1). Those are obtained by bundling together correlated transactions and applying portfolio margining techniques. Such techniques allow market participants to offset their risks and benefit from up to 80% reduction in the collateral required by the CCP for a given portfolio. Additionally, clearing members and CCPs favour clearing for a wide range of clients in various transaction types to diversify away risk. With more diverse clients, CCPs can more easily face a potential default of a client or a clearing member: the CCP could transfer the positions or sell them in auctions faster and at a lower cost, lowering the risk that the financial resources of other clearing members are needed. Market participants thus prefer to clear in a CCP where a variety of interests are met. To compete with an incumbent CCP, a competitor must attract flows of different natures and not just specific, targeted profiles. Market participants seek reassurance that the risk taken in redirecting some of their clearing flows to another CCP is offset by an opposite interest in that CCP and that the risk profile in the incumbent CCP remains the same. Some CCPs would however state that a vast majority of clients, in particular pension funds and institutional investors, do not operate in a wide range of currencies and do not in practice benefit from complex correlations but would rather benefit from a mono-currency cross-product approach to portfolio margining. Second, as highlighted by 62% of the respondents to the targeted consultation, is the insufficient liquidity at EU CCPs. Liquidity is linked to the number of clearing members and clients of a CCP and the variety and size of their interests/positions, as there has to be a balance between payers and receivers. CCP’s liquidity is an important factor for market participants in determining where to clear as in a liquid CCP it is easier to close positions without incurring significant losses, and easier to enter into contracts. Linked to that, in a liquid CCP there are better opportunities to successfully auction out positions of a defaulting clearing member and generally to distribute losses across clearing members if needed, reducing the size of the loss for them. As such, the lower perceived liquidity at EU CCPs is a factor which drives the market to some other recognised third-country CCPs, where liquidity is perceived as greater. This results in dependencies and over-reliance on some third-country CCPs to the financial stability within the EU. Insufficient liquidity is linked to two main issues. First, participation in EU CCPs is more limited than at incumbent third-country CCPs. With a limited participation, liquidity tends to be lower, or is perceived as such. Second, EU CCPs do not offer as broad a range of products/currencies as some third-country CCPs and offer less netting opportunities (see Annex 7). As such, they are seen as less attractive to market participants. As such, , there is a tendency towards concentration in third-country incumbent CCPs. This is linked to: strong economies of scale and scope which characterise the clearing business, cost considerations (i.e. the price paid for clearing the same product at a CCP relative to another one, so called “basis”); and a perception that certain third-country CCPs, e.g. LCH Ltd, are operationally more efficient. Persistent concentration of clearing at incumbent third-country CCPs mechanically contributes to lower liquidity in EU CCPs, as market participants continue choosing the same third-country CCPs. These effects are described in more detail in Section 3.2.2. 3.1.3.Insufficient consideration of cross-border risks One of the main aims of EMIR since its adoption is the mitigation of risks arising from the operation of CCPs in the EU. EMIR 2.2 further developed this framework to mitigate the risks resulting from exposures to third-country CCPs, especially those which are highly interconnected with the EU financial system. However, the supervisory architecture still fails to give due consideration to these cross-border risks and their implications for the financial stability of the EU for three main reasons: concentration of clearing in incumbent third-country CCPs; interconnectedness of the EU financial system; and inefficient cooperation between national authorities. First, clearing is highly concentrated in a limited number of clearing service providers globally (see Section 2.1). When there is significant concentration of clearing in CCPs outside the EU this raises concerns as they, and the large financial stability risk they mitigate for the EU, are mainly supervised by third-country authorities which in times of crisis are likely to have divergent interests to those of the EU. For some asset classes, there is only a small number of EU CCPs offering certain services (e.g. only one EU CCP clears credit derivatives and only one EU CCP clears inflation-rate derivatives). Additionally, as shown in Annex 7, for some third-country CCPs’ clearing offer there is no substitute, not only in the EU but globally, e.g. LME Ltd in the UK is the only recognised CCP clearing certain commodity derivatives which are vital for non-financial entities. This concentration, where a significant proportion of clearing activities of importance to the EU’s financial stability takes place in third-country CCPs thereby creating dependencies for EU market participants (e.g. banks, non-bank financial entities, and non-financial entities) raises concerns. Financial market infrastructures present potential risks (hence their regulation under EMIR), but those risks are potentially compounded if they are outside the EU. A default or disruption at a non-EU CCP or clearing service with a dominant market share can have substantial destabilising effects on clearing members, their clients or on other financial market infrastructures due to the size of the exposures of EU clearing members and clients, the interconnections with the rest of the financial system, and the lack of alternative clearing services. This can be a source of substantial financial stability risks for the EU or its Member States. For this reason, the Commission, in 2017 came forward with its EMIR 2.2 proposal to mitigate those risks. Two UK CCPs, LCH Ltd and ICE Clear Europe, were ultimately identified by ESMA as Tier 2 CCPs, implying a higher degree of systemic importance. The UK in particular grew as an important clearing hub over the years and UK CCPs have created such dependencies for EU market participants. Even if EMIR 2.2 aimed at addressing these concerns by requiring them to comply with the relevant EMIR requirements and granting direct supervisory powers to ESMA over Tier 2 CCPs, those CCPs remain, at least primarily, supervised by third-country authorities that are not part of the regulatory, supervisory and enforcement framework which characterises the internal market nor are they bound by the duty of sincere cooperation to which EU and Member State authorities are subject to under Article 4(3) of the Treaty on European Union. The importance of UK CCPs to EU financial stability was highlighted by ESMA in December 2021; where ESMA concluded that the continued recognition of three clearing services offered by two UK CCPs poses substantial systemic risks to the EU’s financial stability that are not fully mitigated under EMIR. Where a CCP or some of its clearing services are considered to be of a substantial systemic importance this can imply greater financial stability risks per se; e.g. where there are changes in the eligible collateral, margins or haircuts this may create feedback loops that negatively impact sovereign bond markets, and more broadly financial stability. In its report, ESMA outlines various scenarios in which the EU financial stability may be impacted due to events affecting a Tier 2 CCP. The report highlights that such scenarios may be relevant for EU CCPs as well, however “the EU regulatory regime provides stronger mitigating factors to address the risks posed by EU CCPs”. Indeed, EU CCPs are under a common regulatory framework, coordinated supervision and the enforcement framework of the single market and Court of Justice of the EU. This entails coordination among authorities, including in case of market stress or crises. Authorities within the EU are expected to take EU financial stability concerns into account to a greater extent than third-country ones and are subject to the duty of sincere cooperation enshrined in the Treaty on European Union. As Tier 2 CCPs are systemically important financial market infrastructures it is not sufficient to just comply with certain requirements under a regulation, such as EMIR (or to comply with equivalent requirements) to fully mitigate the effects of market stress or crisis. Rather, tools are needed to manage such market stress or crisis in the best possible way to prevent it from spreading through the system. Where a CCP is (or some of its clearing services are) of a substantial systemic importance this becomes even more important as well as difficult. To mitigate the potentially negative effects in the EU and its Member States, a more balanced risk is needed, to ensure clearing is less concentrated in a few non-EU CCPs. Cooperation could only mitigate risks where the non-EU CCP is not considered a substantially systemic CCP; where it is, cooperation cannot mitigate the effects of decisions taken in a crisis scenario as such decisions will likely primarily have the national financial market in mind, even though they can have a material impact on the EU or some or all of its Member States. In the current framework, in case of financial crisis at a UK CCP, no EU body or authority would be in the driving seat for decisions that can have significant impacts on EU firms. To conclude, the main issue with the Tier 2 UK CCPs is therefore that they are financial market infrastructures offering services of substantial systemic importance, thus presenting substantial potential risks to the EU. Since the UK withdrawal from the EU, they are also outside the EU common framework, increasing their systemic importance even further as not part of the cooperation framework within the Union. While EMIR requires Tier 2 CCPs to comply with certain provisions of EMIR and provides ESMA with supervisory powers over Tier 2 CCPs, the actual possibility for ESMA to induce change or enforce corrective actions relies on the cooperation of third-country authorities. In addition, supervisors also have more direct access to information over entities located in their jurisdiction. The situation within the EU derives from very specific circumstances where the UK had established itself as a clearing-hub for the EU before the UK’s withdrawal from the EU. The UK used to be part of the EU legal and cooperation framework, but since its withdrawal from the EU, this is no longer the case. With the UK’s withdrawal from the EU, the fundamental position of UK has changed, and where any decision before Brexit would have been made taking into account also the interests of the EU, this will not necessarily be the case any more. It is therefore not possible to compare the situation between the UK and the EU globally.

Second, the EU financial system is largely interconnected, which may lead to cross-border risks across Member States. Analyses show that derivatives and repo exposures for Eurex Clearing and LCH SA regarding clearing members domiciled in the Euro area, but not the CCP’s home jurisdiction, are comparable to those of clearing members established in the same Member State as those CCPs. CCP links to trading venues established in other Member States also lead to the development of intra-EU exposures and risks. This means that decisions taken by a few national CCP supervisors have an impact which is at least equal over entities established in their Member State and at times even larger on entities (clearing members, clients, institutional investors, etc.) throughout the EU, thereby also possibly impacting the stability of other Member States and the EU at large. Furthermore, it is important to note that under the recently introduced CCP RR Regulation the loss allocation tools in recovery and resolution plans mostly rely on additional resources provided by clearing members and have made the probability of public bailouts more remote. The EU-wide systemic risk impact of EU CCPs is expected to further rise. The current initiative to improve the attractiveness and capacity of EU CCPs is expected to result in additional flows of clearing activity into the EU and into a limited number of EU CCPs that have the capacity to accommodate such increased flow. This in turn would lead to more cross-border activity in the EU as clearing members and clients from throughout the EU will be using progressively a finite number of EU CCPs. As such, CCPs in individual Member States will become increasingly relevant for the EU financial system as a whole. EU authorities and NCAs across the EU thus need an overview of their activities as the potential financial distress of those CCPs could have a significant impact on clearing members and clients located in other Member States. Finally, the framework for supervisory cooperation amongst NCAs for EU CCPs is inefficient and inadequate leading to insufficient consideration of cross-border risks in the EU. EMIR requires national CCP supervisors to consult colleges and ESMA only in specific cases (see Table 3 in Annex 5 and Section 3.2.4), primarily on the authorisation stage (nb. all EU CCPs are authorised and new market entrants are rare) or when the NCA considers that a significant change in the CCP’s operations has taken place (e.g. extension of activities or services or significant change in risk models or parameters). This means that despite the interconnectedness of the EU financial system and the impact that the decisions of a CCP’s supervisor can have throughout the EU, as discussed later in this section, ESMA and other national supervisors are only partially involved in the ongoing activities of EU CCPs (e.g. the annual review and evaluation of each CCPs’ arrangements, strategies, processes and mechanisms to comply with EMIR as well as the evaluation of the risks, including at least financial and operational risks, it is exposed to). Divergent supervisory practices across the EU (e.g. NCAs’ different approaches when a CCP should apply for an extension of its authorisation or for a model validation and, thus, differences when the college and ESMA are consulted) create an unlevel playing field leading to risks of regulatory and supervisory arbitrage for CCPs and indirectly for their clearing members and clients. For example, there are 14 EU CCPs (see Annex 5); in 2021 ESMA was only asked six times to issue an opinion on NCAs’ draft decisions and none submitted decisions for ESMA’s opinion voluntarily. Moreover, three out of these six cases included recommendations to the NCAs for implementation by the CCP either immediately or in a certain timeframe. ESMA, however, has no means of knowing or ensuring whether these are followed (beyond voluntary feedback by the NCA) or of informing interested parties that its recommendations have not been applied, thereby limiting supervisory convergence in the EU. While the diversity of the college membership is an asset as it is representative of the clearing ecosystem, certain stakeholders noted that colleges have limited added value as they in principle agree with the assessment of NCAs – at times even deciding not to agree with the recommendations proposed by ESMA. Since the entry into force of EMIR 2.2, in principle only one college meeting per CCP has been held per year and for a limited number of CCPs, no college meeting has been held in a given year. ESMA has also observed some heterogeneity in the degree of participation of different college members. The involvement of central banks of issue in the supervision of EU CCPs is also limited (i.e. in colleges and as non-voting members of the CCP Supervisory Committee when the latter discusses EU market developments and stress tests), despite the importance of CCPs for the conduct of monetary policy and the functioning of payment systems. The length of procedures for extending services or activities, as well as changes to a CCP’s models also raises financial stability concerns (see also Section 3.1.1). Many changes on risk parameters and methodologies should be approved swiftly by NCAs and ESMA to increase CCPs’ resilience. However, the way Article 49 of EMIR is applied may lead to a rise in the risks that CCPs face if the proposed changes are not applied in time (see Section 3.2.1). For example, during a market stress period in 2022, one CCP noted that, based on their back-testing procedure, the margins requested in one of their products were insufficient and decided to change the model inputs. Even though the Article 49(1e) of EMIR procedure was applied (provisional validation – see Section 3.2.1), it still took four weeks from the moment the CCP informed the authorities of the change to its approval. A default during those four weeks would have put the market unnecessarily at risk due to a known issue. 3.2.What are the problem drivers? 3.2.1.Complex, lengthy, and burdensome procedures When an EU CCP wishes to extend the activities and services it offers (Article 15 of EMIR), and/or to make significant changes to its risk models and model parameters (Article 49 of EMIR) that CCP often faces complex, lengthy and burdensome procedures interacting with their supervisors and the other bodies involved in their supervision under EMIR due to how the processes are structured. This affects the ability of EU CCPs to compete, limiting their attractiveness, and is a source of excessive compliance costs for them (see Section 3.1.1) and is the result of both the relevant EMIR provisions themselves as well as how they are applied by national authorities and ESMA. The vast majority of stakeholders responding to the targeted consultation (90%, i.e. 20 out of 22 respondents to that section) supported the idea of improving the ability of EU CCPs to be competitive by expanding their offer and speeding up the approval process for new products. Respondents (mainly CCPs, but also two business associations, a central bank and a national supervisory authority of a Member State) highlighted that in particular the long EMIR approval process to launch new products had negative consequences on EU CCPs’ competitiveness. They considered the existing governance as well as the requested documentation too complex and pointed to a lack of clear timelines. Three public authorities agreed that there is room for a faster approval process for certain initiatives. Other respondents, notably banks, agreed that it is crucial that EU CCPs are able to increase their offer to make it comparable to the offer of non-EU CCPs. ESMA also notes that improvements in the framework are desirable. In the meeting with Member States on 16 June 2022, Member States agreed in general that procedures under Article 15 and 49 EMIR should be more efficient and the processes improved. The current approval times for an extension of services or activities by EU CCPs are concerning as they significantly lengthen time-to-market, especially as EU CCPs are looking to expand their clearing offer to compete. For example, the procedures for a CCP to extend their services are set out in Article 15 of EMIR, however these procedures are only triggered once the application has been declared complete. It is understood from stakeholders, that the time taken for an application to be declared complete makes up the largest part of the process. Sometimes it takes several months to get the approvals for launching a service or activity (on average, 8.5 months since EMIR 2.2 was adopted, with timeframes ranging from 3 to 15 months after an application has been declared complete). One CCP noted that the process from submission of the first application took more than 2 years. Reportedly, such delays are due to lengthy interactions with the NCA when the latter assesses if a new initiative is an “extension of authorisation” or not, and when the authority assesses the CCP’s application to determine its completeness. In practice, an NCA can ask the CCP for additional information without an ultimate deadline which can lead to indefinite delays for the review of the application. CCPs have asked for more clarity from the beginning on what documents/information are exactly expected, while other stakeholders believe the observed delays are due to overly complex supervisory processes and inefficient interactions between national supervisors, colleges and ESMA. Similar concerns were raised by market participants on the length and complexity of procedures for validating significant changes to CCPs’ risk models and model parameters under Article 49 of EMIR. EMIR 2.2 amended the process to try to simplify the procedure. In the event, the end result is multiple consecutive procedures, lengthening the time taken to obtain model approval significantly. This procedure requires validations by the NCA, ESMA and an independent party, as well as an opinion of the college. As such, it may take from several months up to 2.5 years (7.1 months on average since EMIR 2.2 was adopted) to obtain such validations. This leads to high compliance costs and to potentially even higher opportunity costs due to lost revenues because products cannot be offered on time and impacts on the resilience of EU CCPs due to the significant time needed to bring new products to clearing participants and to adopt new or amended risk models. As noted, these problems derive from different identified issues, including that a CCP may be asked to submit documents several times and the respective procedures vary based on which authorities are involved, but also due to uncertainty on certain aspects of the validation process: e.g. stakeholders perceive a lack of clarity on what documentation that has to be provided when applying for a new approval or validation. In addition, stakeholders noted that even a decision whether a change is material or not (and hence should be subject to the procedure of Article 49 of EMIR) may take weeks. To ensure timely management of its risks and avoid procyclical behaviour, it is important for a CCP to quickly adapt, e.g. the models according to which it seizes its default fund, to adjust its models for margin calculation to changes in market volatility or in reaction to the tests performed on the models themselves. For example, in times of stress, CCPs may need to adjust model parameters quickly, so that such parameters actually reflect market dynamics that are important for a proper calculation of margins and thus for risk management. EMIR has a “faster” procedure (i.e. a provisional validation procedure) for changes to risk models and parameters where justified (Article 49(1e) of EMIR). As its scope is, however, considered unclear and limited, it has not been used much in practice (e.g. NCAs are unsure or reluctant to approve changes). Moreover, market participants noted that this process does not reduce the burden for small and incremental improvements to CCPs’ risk management capabilities, including under the proposed regulatory technical standards. Market participants say, in essence, that that procedure is used as an emergency measure but not to facilitate or expedite the overall validation process. Finally, even for cases where provisional validations have been agreed, the lack of deadlines and process for the subsequent validation of the model changes poses concerns of level playing field across CCPs and potential regulatory arbitrage. The burdensome and lengthy procedures required for CCPs to extend their services or activities (Article 15 of EMIR) and for model validations (Article 49 of EMIR) also, as indicated above, lead to compliance costs arising from, amongst others the need to get external legal advice, engage consultants and use significant internal resources, e.g.: (a) legal counsel fees: from EUR 150 000 to EUR 250 000 (Article 15 of EMIR procedure); between EUR 10 000 and EUR 50 000 (Article 49 of EMIR procedure) for medium and complex model changes; (b) external consultant fees: the independent validation costs for an Article 49 of EMIR procedure range from EUR 25 000 to EUR 150 000. For Articles 15 and 49 procedures, CCPs may need external consultants, the costs for which may range between EUR 200 000 and EUR 350 000. Depending on the length of the approval procedure, those costs may increase; (c) internal CCP resources: CCPs employ 4 to 6 full time equivalents (FTEs) to work on these procedures, but in some cases as many as 13 FTEs were required. Internal costs may be from EUR 200 000 to EUR 300 000. Staff dedicated to the projects for longer periods may also impact the conduct of other activities; (d) application fees for Articles 15 and 49 procedures: CCPs may have to pay fees to their NCAs. These range for Article 15 from, e.g. a fixed fee of EUR 50 000 in one Member State to a variable fee ranging from EUR 8 352 to EUR 723 836 in another. Similarly, for Article 49, the fee also varies; e.g. there is a fixed fee of EUR 50 000 in one Member State and a variable fee ranging from EUR 8 352 to EUR 361 918 in another. Other costs for CCPs include the opportunity cost of lost revenue from a new service; increased risk if the change was to strengthen the risk management model (see also Section 3.1.3); increased operational risk if the service was to improve the efficiency and automation of the process; risk of changes to the law and the impossibility to adjust its rules during the process; and the cost of internal process support. These costs are often also passed through to clearing members and, subsequently, their clients. First, they generally translate into a higher cost of clearing for clearing members and clients; they also face prolonged uncertainty and additional implementation costs (including adapting their IT systems) due to their inability to plan with confidence around launch dates of new products over an extended period as these are often aligned with CCPs. A delay in the provision of services or in certain updates by CCPs may also lead to more costs for clients if they need to use other CCPs for the respective product, and thus maintain dual CCP set-ups. Also, in case of changes of operating systems, procedures and contracts with customers need to be changed every time. Finally, in other jurisdictions the time required for CCPs to extend their services or to amend models is significantly shorter and the costs substantially smaller. In the US, for example, a CFTC registered CCP may implement a new rule or amendment in 10 business days after a written self-certification to the CFTC that the rule or change complies with the Commodity Exchange Act and CFTC Regulations. In certain circumstances, the CFTC can extend this period, but this seems rare. It has also been noted that the underlying documentation can be easily provided (sometimes in hours). The CFTC requires every amendment to be filed, regardless of its relevance from a risk perspective or if it relates to the license of the CCP. This means a CCP may need about 50 filings a year. Nonetheless, the estimated cost burden remains lower than under EMIR; even the cost of an extended procedure with the CFTC is estimated to be 25-50% lower than that under EMIR. In the meeting with Member States on 16 June 2022, three Member States suggested to further look into ways that would allow CCPs to launch new products. However, Member States’ experts pointed to the need to carefully frame such approaches. One Member State particularly highlighted that this option should only be available if non-systemic risks are concerned. In the UK, EMIR has been onboarded into UK law following the withdrawal of the UK from the European Union. While procedures are therefore the same as in the EU, UK CCPs had built up a significant position in the global clearing market already before the introduction of the EMIR requirements. In addition, since Brexit, UK CCPs have only one supervisor and there is no need to involve authorities from other Member States or refer to a supranational authority such as ESMA, rending the decision-making process simpler and potentially faster. Due to these differences, third-country CCPs established in some jurisdictions are able to adapt faster to market developments, thus having a potential advantage over EU CCPs.

3.2.2.Limited participation in EU CCPs and concentration in incumbent CCPs Participation in UK-based CCPs by EU clearing members and clients is greater than that in EU CCPs, as shown in Section 2.1. As more participants bring more transactions to CCPs, differences in participation lead to greater liquidity at UK CCPs than at EU CCPs, which in turn undermines the attractiveness of EU CCPs as clearing participants consider that liquidity ensures an effective market with less volatility, tighter spreads and more stable prices and the ability to unwind positions at the lowest possible cost if need be. In turn, the more limited demand for clearing services at EU CCPs acts as a disincentive to develop and broaden their product offering, contributing to the demand and supply-side problems. There are three main reasons why the bulk of the activity in interest rate derivatives of EU clearing members and clients takes place in UK CCPs: First, clearing tends to be a concentrated business, based on economies of scale and scope: the greater the netting opportunities provided by a given CCP, the more it is attractive as a location for clearing. Portfolio netting through CCPs allows both parties to hold lower margins – either by bulking together the same type of products (e.g. interest rate swaps) referencing different currencies (cross-currency margining), or by grouping together different products (e.g. interest rate swaps, interest rate futures and repos) denominated in the same currency (cross-product margining). Most CCPs provide portfolio margining services based on cross-currency correlations, while some CCPs, e.g. some EU ones competing in interest rate derivatives, provide portfolio margining based on cross-product correlations. For example, LCH Ltd offers netting opportunities for the same product across different currencies, while Eurex Clearing offers netting in the same currency but across different products. Cross-currency and cross-product margining are allowed under EMIR. These different approaches make it difficult for clearing members and clients to compare the different CCPs’, e.g. netting efficiency. Netting possibilities give rise to significant network effects which drive market participants to pool their clearing activities in one CCP. As mentioned by most banks acting as direct clearing members in the targeted consultation, the netting advantage in terms of reduced margin requirements is a much more decisive factor for market participants’ choice of a CCP than the respective direct costs of clearing. Second, stakeholders stated that the operational efficiency of a CCP was a key factor in their choices where to clear. In this regard, it has been mentioned that EU CCPs should improve the procedures to accept new participants to make them comparable to those offered of non-EU CCPs. All things equal, if it takes double the time for a given participant to finalise all the checks and paperwork to access an EU CCP than it would take to access a non-EU CCP offering the same services, that participant is likely to favour the CCP where it is easier and faster to start clearing. Also, some stakeholders mentioned that greater efficiency is needed in the procedures which are now in place to ensure that, in case a clearing member defaults, its clients’ positions are successfully transferred to another clearing member. Third, considerations around liquidity are also key in driving participation as the more liquidity in a given CCP, the cheaper it is to clear in it, all things equal. In the meeting with Member States on 30 March 2022, Member States generally supported the overall objective to reduce exposures to Tier 2 CCPs, with three asking for more analysis on the stability risks. 3.2.3.Interconnectedness of EU financial system CCPs operating in the EU are highly interconnected through a range of channels. First, CCPs are interconnected via their clearing members. Many of the largest global banks are members of multiple CCPs, illustrating the potential for contagion. For example, BNP Paribas is a member of at least five EU CCPs. In addition, some clearing members are particularly dominant in a given CCP as illustrated in Figure 2 below. Another way to highlight the degree of interconnectedness between market participants in the OTC derivatives market is to focus on "who trades with whom". The ESRB published a paper in September 2016 illustrating the network structure of the OTC derivatives market through a visualisation of the outstanding interest-rate swap (IRS) positions in the market. The study shows that CCPs, big clearing members (referred to as G16 dealers) and banks, are connected to a lot of counterparties, with many connections between them, suggesting a high potential for system-wide contagion. This indicates the central role of CCPs and the importance of client and indirect clearing through the clearing members, as the latter serve as "gateways to clearing" for buy-side counterparties and create interconnections between CCPs and the wider system. Second, CCPs can be interconnected via so-called interoperability arrangements which allow clearing members of one CCP to clear securities and money market transactions with clearing members of another CCP. This is the case for EuroCCP, LCH Ltd. and SIX x-clear in various equities markets, for LCH S.A. (established in France) and Euronext Clearing (established in Italy) in various bond markets. Finally, as shown in ESMA’s 2020 stress test report CCPs are connected through liquidity providers and custodians. If CCPs were to trigger their committed or uncommitted liquidity lines at the same time due to a major market stress, it is possible that those “commitments” cannot be fulfilled altogether or that pressure is put on the liquidity providers to grant liquidity to CCPs in one jurisdiction over another. For custodians, the dependency can be characterised as a “one-to-many”: a custodian’s failure is likely to have a repercussion over all CCPs using its services. The various degrees of interconnectedness of CCPs are partly addressed through the supervisory structure enshrined in EMIR as amended by EMIR 2.2. This framework allows for supervisors of clearing members, CSDs, trading venues or other CCPs linked with an interoperability link to be informed of developments and potential risks stemming from a particular CCP (see Sections 2.2 and 3.1.3). This supervisory structure allows for ESMA and, to a lesser extent, the central banks of issue to foster the harmonisation of practices across NCAs. Recent events, e.g. the Covid crisis of 2020 or the war in Ukraine in 2022, have hit markets in a shock. While CCPs have proven to be resilient, supervisors and policy makers were partially blind as to the potential weaknesses experienced by clearing members, clients or CCPs, lacking an eagle-eye view on the market and suffering from a lack of information from third-country jurisdictions but also across Member States in the EU. It is thus beneficial to strengthen the EU-level insight into cross-border risks which can emerge in such scenarios, as the powers and tasks granted to ESMA and the central banks under the current framework do not appear sufficient in such cases, and could therefore be made more effective. In particular, recent events have shown the importance of strengthening the EU-level authorities’ role in coordinating responses and gathering the overview of risks beyond the national level in emergency situations. Other jurisdictions, such as the US or Japan, have put in place other mechanisms to protect themselves from financial stability risks from the interconnectedness of their own financial systems, including, e.g. a more expansive approach to supervision (see Section 3.3.2). This illustrates the fact that the issue is widespread, albeit different in nature, and cannot be adequately addressed by international standards. 3.2.4.Inefficient framework for supervisory cooperation Despite the amendments introduced relating to the supervision of EU CCPs following the adoption of EMIR 2.2 (see Section 2.2), the framework for supervisory cooperation remains inefficient. First, multiple actors are involved at multiple levels (EU and national) in the adoption of decisions on the same supervisory issues, leading to duplication of assessments, longer procedures (see Section 3.2.1) and increasing compliance costs (see Section 3.1.1). Second, NCAs need ESMA’s opinion before adopting a limited number of supervisory decisions, leading to divergent supervisory approaches and an insufficient consideration of cross-border risks (see Section 3.1.3). Third, central banks of issue are insufficiently involved on EU CCP supervisory matters that are of direct relevance to the conduct of monetary policy and the smooth operation of payments systems, leading to insufficient consideration of cross-border risks (see Section 3.1.3). According to ESMA, this creates a “complex, inconsistent and sometimes duplicative system resulting in long procedures and possible uncertainties regarding the expected outcome of supervisory processes”.

Regarding the first two points, EMIR 2.2 introduced a structure where while NCAs remain responsible for the adoption of supervisory decisions, for some supervisory issues, the opinion of ESMA or the college (or, in certain cases, both) are required (see Table 3, Annex 5). In practice, this means that for a new application by a CCP: the home NCA needs to prepare a risk assessment of the CCP and a draft decision; the ESMA CCP Supervisory Committee is then asked to adopt a draft Opinion on the NCA’s decision where necessary to promote a consistent and coherent application of the EMIR requirement concerned by the application; and the college is asked to adopt an Opinion determining whether the applicant CCP complies with all the requirements under EMIR. While ESMA’s Board of Supervisors, the CCP Supervisory Committee, and the college have each a different composition which partially justifies the requirement to consult all these bodies, the current structure leads to inefficient cooperation as the same matters are discussed in three fora. This effectively increases costs for the authorities involved and for CCPs (see Section 3.2.1). NCAs do not have to consult ESMA or other NCAs on most supervisory decisions and hence get little input on potential cross-border impacts of their decisions. This raises financial stability concerns (see Section 3.1.3) and inconsistencies as, e.g. ESMA is consulted on a limited number of areas, any recommendations are non-binding, market participants are generally not aware that the NCA or the CCP in question has elected not to implement them. Similarly, there is no effective mechanism to ensure that a similar approach is adopted by all NCAs. On the third point, central banks’ involvement in EU CCP supervision is limited (see Section 2.2) despite the direct impact of CCP’s activities on the implementation of monetary policy and the smooth operation of payment systems (as basic tasks entrusted to the European System of Central Banks under the Treaty on the Functioning of the EU (TFEU) (Article 127(2)). In addition, there are inconsistencies in the involvement of central banks in the supervision of EU and third-country CCPs. While for third-country CCPs, central banks can participate as non-voting members to all discussions of the CCP Supervisory Committee, for EU CCPs they do so only in two instances: EU-wide CCP stress tests and the discussion of market developments concerning EU CCPs. In addition, central banks are not involved in the adoption of many decisions that affect EU CCPs (which the EU legislators explicitly acknowledged as of direct relevance to them), i.e. liquidity risk controls and four key areas with embedded liquidity risk, namely margin requirements, collateral, settlement and approval of interoperability arrangements. The lack of input from central banks in these areas makes the cooperation between supervisors less efficient and hinders the full assessment of the cross-border risks raised by EU CCPs’ activities from a central bank of issue perspective. It is also a concern as adequate CCP self-insurance against liquidity risk is a prerequisite for central banks to consider any potential requests for access to central bank liquidity. Considering as well that the risk implications of EU CCPs for EU currencies are expected to further rise with the envisaged growth of central clearing in the EU, it should be assessed how the role of central banks of issue in the monitoring and supervision of EU CCPs could be potentially enhanced. The vast majority of stakeholders replying to the targeted consultation (90%, i.e. 20 out of 22 respondents) supported the idea of improving the ability of EU CCPs expand their offer and speeding up the approval process for new products. Respondents (mainly CCPs, but also two business associations, a central bank and a national supervisory authority of a Member State) expressed concerns about the governance as well as the requested documentation, which were viewed as too complex with unclear timelines, resulting in high regulatory compliance costs were high. Three public authorities agreed that there is room for a faster approval process for certain initiatives. In the meeting with Member States on 16 June 2022, Member States agreed in general that procedures under Article 15 and 49 EMIR should be more efficient and the processes improved. 3.3.How likely is the problem to persist? This section considers the potential impacts if no measures are taken to address the identified problems. For the purposes of the analysis, it is assumed that equivalence for the UK remains until it expires on 30 June 2025: as such, it is assumed that the regulatory framework of the UK will remain aligned with EMIR until 2025. In such a scenario, which presents the baseline scenario for the assessment of options (see Section 6.1), the problems are likely to remain, and indeed, even grow. Market participants will continue to clear in incumbent Tier 2 CCPs, and where liquidity in EU CCPs is likely to remain unchanged. Consequently, absent any intervention, the over-reliance on non-EU CCPs will continue and cross-border risks will rise not just in the EU financial sector but also in the wider economy. Relying on existing tools, such as capital buffers for banks, would not address the problems to a sufficient extent: even though it is possible to address excessive concentration of exposures towards CCPs under the current banking framework, such tools are not sufficiently prominent to induce the desired behavioural change. 3.3.1.Limited attractiveness of EU CCPs and over-reliance on non-EU CCPs The limited international attractiveness of EU CCPs and over-reliance on non-EU CCPs stem from two main problems: supply-side problems (see Section 3.1.1) and demand-side problems (see Section 3.1.2). As regards supply-side problems, if nothing is done EU CCPs will continue to face long, burdensome and complex procedures when trying to launch new products or services. This will limit their ability to respond quickly to market developments, bring new products to the market and meet the demands of market participants. As long as, amongst other things, EU CCPs are perceived by market participants as less able to quickly offer solutions to specific needs than third-country CCPs recognised by ESMA, market participants will continue to clear at non-EU CCPss. EU CCPs will also continue to be less able to respond quickly to market developments through changes in risk models. CCPs established in jurisdictions where this can happen more quickly are likely to be better able to attract business. The options below therefore explore how to facilitate a quicker provision of new services and adaptations of models by EU CCPs. As regards demand-side problems (see Section 3.1.2), clearing is a concentrated industry where economies of scale matter and where market participants tend to clear their trades at the same CCP to gain from operational and margin efficiencies. The problem tree also shows the circular relationship between supply and demand at a given CCP. In this regard, in several Communications, as well as in the equivalence decisions adopted to avoid cliff-edge Brexit scenario, the Commission urged EU market participants to reduce their excessive exposures to Tier 2 CCPs, but such calls have led to limited results. Participants continue clearing mostly in non-EU CCPs and, while a certain amount of short-term interest rate derivatives have seen higher volumes in the EU, the bulk of the exposure remains outside of the EU. Absent any uptake in the liquidity at EU CCPs, market participants would be unlikely to shift their positions inside the EU substantially. Market participants claimed that EU CCPs do not offer a sufficiently wide range of products to compete effectively with non-EU CCPs. EU CCPs in turn claimed that, absent any firm interest and commitment to shift business inside the EU, the return on investment would not be certain enough to take the risk to launch new products, also given the substantial sunk costs of the procedures to extend services. Market participants also stated that it would not be efficient and cost-effective for them to split their portfolios between two or more CCPs offering the same products and that the incentive to move should solely be based on an economic interest to do so. The central clearing obligation will apply to Pension Scheme Arrangements (PSAs) from June 2023, as provided for under EMIR. This will broaden the clearing base and would benefit EU CCPs if PSAs clear in the EU. However, PSAs that already clear on a voluntary basis do so in greater proportion at UK CCPs at the moment, like the rest of the market. Absent regulatory intervention, PSAs are likely to continue clearing to a greater extent in the UK than in the EU, in spite of efforts made by EU CCPs in recent years to step up their offer to facilitate clearing by these entities. All in all, absent any changes, exposures to third-country CCPs are likely to increase, presenting increasing risks to the EU’s financial stability in the medium term. In essence, the problems identified, and thus the risks stemming from the excessive exposure to third-country CCPs, are likely to worsen. 3.3.2.Risks to EU financial stability Risks to financial stability stem from the level of exposure and the insufficient consideration of cross-border risks (see Section 3.1.3). Absent any regulatory intervention, cross-border risks would rise in the EU financial sector but also in the wider economy. In the case of non-EU CCPs, the risks of inaction for financial stability are twofold. First, in a stress scenario, e.g. due to the default of clearing members or operational failures, involving a non-EU CCP on which EU clients and clearing members rely to a high degree, certain consequences have been identified by ESMA, “In times of crisis, changes to the eligible collateral, margins or haircuts may create feedback loops that negatively impact sovereign bond markets of one or more Member States, and more broadly the EU financial stability. Disruptions in markets relevant to monetary policy implementation may hamper the transmission mechanism critical to CBIs. During recovery and resolution events, the Tier 2 CCPs, or the UK resolution authority, may take discretionary measures directly adversely impacting EU clearing members”. Similar aspects were highlighted by the ESRB. In its report, ESMA further outlines various scenarios in which the EU financial stability may be impacted due to events affecting a Tier 2 CCP (see also Section 3.1.3). The report highlights that such scenarios may be relevant for EU CCPs as well, however “the EU regulatory regime provides stronger mitigating factors to address the risks posed by EU CCPs”. Hence, even though Tier 2 CCPs are supervised by ESMA, any enforcement of supervisory decisions relies on the cooperation of the foreign supervisor to enforce such supervisory decisions. In addition, ESMA has no formal powers as regards Tier 2 CCPs crisis management . Additionally, third-country authorities are not part of the EU common regulatory, supervisory and enforcement framework (i.e. they are not subject to the Court of Justice of the EU nor bound by its interpretation of EU law), with the related potential consequences in terms of coordination. Supervisors also have more direct access to information over entities located in their jurisdiction. In the current framework, in case of crisis at a UK CCP, no EU body or authority would be in the driving seat for decisions that could have significant impacts on EU firms. Second, the over-reliance on non-EU CCPs creates an unsustainable dependency – if the critical services provided by those CCPs become unavailable, there is in some cases no viable substitute, inside or outside the EU. For example, for the three services provided by the Tier 2 CCPs which were identified as of substantial systemic importance, ESMA noted that “The three CCP services identified as being of substantial systemic importance perform functions critical to EU market participants. They support capital formation, risk transition, central risk management and market liquidity in interest rate and credit markets through their provision of clearing services to EU banks, investment funds, insurance companies, pension funds and corporates. The large dependencies of the EU stem from the size of the clearing services, in combination with their interconnectedness with EU clearing members and clients in multiple Member States, their dominant nature, and the current lack of viable alternatives. In addition, they are of relevance for financial stability in the EU and for EUR monetary policy implementation, with SwapClear services for PLN interest rate derivatives being relevant for the financial stability in Poland”. Importantly, in ESMA’s assessment the existing alternatives to LCH Ltd (within EU and in another third country) are expected to only partially be able to take over LCH Ltd’s role at present. In the case of EU CCPs, under the baseline scenario they remain mainly supervised by their NCA and there is an identified insufficient consideration of cross-border risks. The college and ESMA are involved, but they can only influence the supervision of EU CCPs to a limited extent. As shown in Section 3.2.4, the current framework for supervisory cooperation in the EU remains complex and at times inefficient or inconsistent. This is sub-optimal in terms of the ability of the EU supervisory system to properly identify and oversee cross-border risks, including the risks which cut across the clearing ecosystem with its multiple actors. Absent any changes, exposures to third-country CCPs are likely to rise, presenting more risks to the EU’s financial stability. In essence, the problems identified are likely to worsen as exposures to third-country CCPs continue to rise. Risks could even rise further should UK authorities decide to diverge from the current regulatory framework.

The level of exposure to UK CCPs by EU market participants is without precedent however the issue of reliance to foreign entities are considered by other countries where different jurisdictions have chosen different ways to implement the international principles for financial market infrastructures in their legal frameworks. Within these frameworks, they have also opted to manage their exposure to foreign entities to protect their financial and economic system from undue risks, but the type and nature of the risks faced varies considerably between jurisdictions. US market participants are active at UK CCPs such as LCH Ltd, which holds a substantial market share also in the clearing market for certain US dollar-denominated products. However, in contrast to the EU, the US reliance on UK CCPs is lower and US CCPs offer a sizeable clearing alternative. The US also has strict rules under which, for example, all CCPs which wish to provide services to US firms must be directly registered and supervised by the CFTC. Interestingly, the proportion of US dollar-denominated interest rate derivatives cleared in US CCPs vs. UK CCPs varies significantly over time, minimising the arguments brought forward by market participants that having two CCPs competing on the same asset class creates inefficiencies and undue fragmentation. In Japan, Yen-denominated interest rate derivatives entered into by Japanese financial institutions and subject to the clearing obligation are mostly cleared at the local CCP. 4.Why should the EU act? 4.1.Legal basis EMIR sets out the regulatory and supervisory framework for CCPs established in the EU and third-country CCPs that provide clearing services to clearing members or trading venues established in the EU. The legal basis for EMIR is Article 114 of the TFEU as it aims at establishing common rules for OTC derivatives, CCPs and trade repositories to avoid divergent national measures or practices and obstacles to the proper functioning of the internal market while ensuring financial stability. Considering that this initiative proposes further policy actions to ensure the achievement of these objectives, the related legislative proposal would be adopted under the same legal basis. 4.2.Subsidiarity: Necessity of EU action The problems identified (Section 3.1) cannot be addressed by Member States acting alone and necessitate EU action. The review could amend certain provisions of EMIR, in particular to enhance the attractiveness of EU CCPs by facilitating their ability to bring new products to market and reducing compliance costs, strengthening EU-level supervision of EU CCPs and incentivising clearing in the EU. EU action would therefore lead to reducing our over-reliance on third-country CCPs and thus limit the risks to EU financial stability. Efficient and competitive clearing markets contribute to deeper, more liquid markets in the EU and are one of the foundation stones for the development of the CMU. 4.3.Subsidiarity: Added value of EU action Member States and national supervisors cannot solve on their own the systemic risks of highly integrated and interconnected CCPs that operate on a cross-border basis beyond the scope of national jurisdictions or mitigate risks arising from diverging national supervisory practices. Member States cannot on their own enhance the attractiveness of EU CCPs, incentivise clearing in the EU and address the inefficiencies of the framework for the cooperation of national supervisors and EU authorities. As such, EMIR aims to increase the safety and efficiency of CCPs in the single market while ensuring financial stability and this cannot be sufficiently achieved by Member States, as the co-legislators acknowledged in 2012 when adopting EMIR (and in 2019 when adopting EMIR REFIT and EMIR 2.2). Therefore, by reason of the scale of actions, these objectives can be better achieved at EU level in accordance with the principle of subsidiarity as set out in Article 5 of the TEU. 5.Objectives: What is to be achieved? 5.1.General objectives The general objective of EMIR is to reduce systemic risk by increasing the safety and efficiency of the OTC derivatives market within the EU and globally. The general objective of this initiative is therefore to reduce the over-reliance on Tier 2 CCPs to address the potential risks to the EU financial stability, as highlighted in ESMA’s 2021 report on UK CCPs (see Section 3.3.2). The policy options should provide incentives for market participants to clear in EU CCPs and adjust their exposures to Tier 2 CCPs to the point where over time, EU CCPs have built up sufficient capacity. This would help address the financial stability risks identified, including by ESMA, and would offer a credible and rapid way to on-shore the activities of those CCPs in case of need. In parallel, the policy options should ensure that those EU CCPs are attractive and appropriately supervised. The aim would be to reduce the excessive exposures to a level where the “substantial” systemic importance, as identified by ESMA in its report, achieves a level where the framework set out in EMIR to manage risks from third-country CCPs is sufficient to preserve the EU’s financial stability. This means at least bringing the CCPs in question to a Tier 2 category within EMIR, and not exceeding that as it is currently the case for some clearing services. The announcement of these measures should already prompt market participants to take action, which will help reduce exposures before 2025. . The overarching policy objective can be achieved by pursuing the following specific objectives: enhance the attractiveness of EU CCPs, by making it easier to bring new products to market and reducing compliance costs; encourage clearing in EU CCPs; and enhance the assessment and management of cross-border risks. In ESMA’s conclusion, that certain clearing services are currently of substantial systemic importance for the financial stability of the EU or one or more of its Member States, the measures to be taken to mitigate this were also considered. ESMA is required to assess under Article 25(2c) EMIR if a CCP or some of its clearing services are of such substantial systemic importance that that CCP should not be recognised to provide certain clearing services. As part of this, ESMA concluded that a potential non-recognition with a shorter transition period, would be disruptive for all three clearing services, maximising transfer costs including the cost of breaking netting sets. ESMA noted that a longer adaptation period would reduce this cliff-edge effect, helping to minimise costs for EU market participants. It would also provide time to incentivise a move to EU CCPs, e.g. EU CCPs will be able to widen their product offering. Hence, whilst EU clients benefit from efficient clearing today, it comes at a cost, and a potential significant cost in the future. Uncovered financial risk is not a visible daily cost but could materialise in a stress scenario. This would be detrimental to the entities clearing as the costs for a defaulting CCP will be borne by clearing members and clients, without EU supervisors being able to manage those effects. The alternative is equally detrimental to clearing members and clients, notably if ESMA in reassessing the situation concludes that the clearing services identified in their 2021 report are still considered of substantially systemic importance, and recommends such clearing services not to be recognised. Achieving the objectives set out below would help adjust the balance of costs and benefits for market participants, reducing excessive exposures to a level where the framework for third-country CCPs introduced by EMIR 2.2 may be considered sufficient to mitigate risks to the EU’s financial stability while preserving access to global clearing in combination with adequate access to clearing through competitive EU clearing members. This should be achieved to the largest extent possible by June 2025, when the current equivalence decision for UK CCPs expires. It is envisaged that market participants anticipate the implementation and start preparing in advance. Many banks, for example, already have accounts established at EU CCPs in order to anticipate Commission and ESMA decisions, as such, it is likely that the market will not wait for the full legal implementation of the proposed measures (including, e.g.