COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE EUROPEAN CENTRAL BANK Responding to challenges for critical financial market infrastructures and further developing the Capital Markets Union
Date: 2017-05-04
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: capital market, financial instrument, financial intervention, financial services, financial transaction, market supervision, monetary crisis, third country

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 4.5.2017  COM(2017) 225 final   COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE EUROPEAN CENTRAL BANK Responding to challenges for critical financial market infrastructures and further developing the Capital Markets Union  
 
 
1/ Introduction 

The  financial  crisis  demonstrated  that  the  lack  of  transparency  in  the  derivatives  sector  and 
the  complex  interdependence  between  financial  market  participants  increased  uncertainty  in 
times  of  stress  and  posed  risks  to  global  financial  stability.  In  2012,  based  on  the  decisions 
taken  by  the  G20  in  2009  in  response  to  the  financial  crisis,  the  EU  adopted  the  European 
Market  Infrastructure  Regulation  (EMIR)  to  address  these  concerns  by  regulating  Central 
Counterparties  (CCPs),  ensuring  consistency  of  CCPs'  supervisory  oversight  via  colleges  of 
supervisors including relevant national supervisors and the European Securities and Markets 
Authority  (EMSA),  and  requiring  standardised  over-the-counter  (OTC)  derivatives  to  be 
cleared in CCPs. Since then, CCPs have gained an increasingly central role in capital markets 
in Europe. Today, the European Commission adopted a proposal for a first set of amendments 
to EMIR. The objective of that proposal is to reflect the experience gathered during the first 
years of application of EMIR by making the application of the Regulation simpler and more 
proportionate  in  certain  areas  and  to  create  further  incentives  for  CCPs  to  offer  central 
clearing of derivatives to counterparties in order to make the financial system even safer. 

Beyond today's proposal the Commission is of the view that, in view of the challenges in the 
area  of  derivatives  clearing,  further  changes  will  be  necessary  to  improve  the  current 
framework  that  ensures  financial  stability  and  supports  the  further  development  and 
deepening of the Capital Markets Union (CMU). 

2/ Context and current challenges 

Clearing derivatives transactions is a global financial service. As such, most clearing is done 
across  borders,  both  within  the  EU  and  internationally  with  CCPs  established  in  third 
countries. The scale and importance of CCPs in Europe and globally has nearly doubled since 
the  post-crisis  G20  commitment  to  clear  standardised  OTC  derivatives  through  CCPs.  On 
average  62%  of  their  outstanding  value  was  centrally  cleared  by  CCPs  across  all  types  of 
derivative contracts1. More specifically, the Bank for International Settlements estimated that 
the  volume  of  cleared  OTC  transactions  at  the  end  of  June  2016  amounted  to  $337  trillion 
globally, of which the large majority ($328 trillion) are interest rate derivatives. The growing 
importance  of  clearing  and  the  corresponding  increasing  volumes  present  challenges  which 
are widely recognised by governments and public authorities. 

EU CCPs are already well-regulated and have robust resources to deal with financial distress 
under EMIR. Moreover, the Commission's proposal of December 2016 for a regulation on the 
recovery  and  resolution  of  CCPs2  provides  a  toolbox  to  manage  the  remote  possibility  of  a 
CCP entering into difficulties.  

Nevertheless, the growing systemic importance of CCPs for the EU and the inter-linkages to 
the  financial  system  as  a  whole  underline  the  need  to  enhance  the  current  supervisory 
arrangements  which  currently  rely  on  a  central  role  for  the  home  Member  State  with 

1 BIS, Statistical release, OTC derivatives statistics at end-June 2016, November 2016. 
2  COM (2016) 856 final – 2016/0365 (COD) 

2 

 
 
                                                            
coordination  in  EU-colleges  of  national  authorities  with  the  participation  of  ESMA.  This  is 
particularly  the  case  as  clearing  services  are  strongly  concentrated  in  a  limited  number  of 
CCPs  across  the  world  and  in  the  EU,  thereby  increasing  the  importance  of  the  most 
significant  CCPs  for  the  financial  stability  and  market  functioning  of  all  Member  States 
beyond that of the home Member State that authorised and supervises a CCP. 

In  this  context,  the  foreseen  withdrawal  of  the  United  Kingdom  from  the  EU  will  have  a 
significant  impact  on  the  regulation  and  supervision  of  clearing  in  Europe.  At  present,  as 
much as 75% of euro-denominated interest rate derivatives are cleared in the UK. Derivatives 
denominated  in  some  other  Member  States'  currencies  are  also  cleared  in  the  UK.  These 
transactions directly impact the responsibilities, including in the area of monetary policy, of 
the relevant EU and Member State institutions and authorities.  

3/ Further steps to ensure safety and soundness of CCPs 

Enhanced supervision  

Overcoming  the  fragmentation  of  the  EU  regulatory  framework  along  the  lines  of  national 
borders  and  promoting  the  efficiency  and  effectiveness  of  the  European  clearing  and 
settlement  systems  was  already  identified  in  the  November  2001  Giovannini  Report.  The 
EMIR  Regulation  greatly  contributed  to  this  by  providing  a  single  consistent  and 
comprehensive set of rules that apply in the Single Market, and represent a basis for further 
supervisory convergence. 

In  the  context  of  the  development  of  the  CMU,  the  Commission  is  considering  how  more 
integrated supervision by the supervisors and responsibilities of the central bank issuing each 
relevant  currency  (central  bank  of  issue)  of  financial  market  infrastructures  and  market 
participants at EU level can support the development of deeper and better integrated capital 
markets. The urgency of further developing and integrating EU capital markets was stressed 
already  in  both  the  Communication  on  CMU  of  September  20163  and  in  the  ongoing 
consultation on the operations of the European Supervisory Authorities (ESAs).4 

Strengthening the supervisory functions and the responsibilities of the central bank of issue at 
European level is at the heart of these efforts given their central role in accelerating market 
integration and eliminating regulatory arbitrage or a race to the bottom. Critical capital market 
functions whose sound performance and effective supervision is central to the functioning of 
capital markets call for more centralisation of supervision. Therefore, adaptations to the legal 
framework  in  relation  to  supervision  by  the  European  Securities  and  Markets  Authority 
(ESMA),  and  in  relation  to  the  responsibilities  of  the  central  bank  of  issue  are  necessary. 
Consideration  must  be  given  amongst  other  things  to  authorisation  of  CCPs  and  ongoing 
supervision at EU level, for instance by means of monitoring financial resources and liquidity 
risk.  

3 Communication on the "State of the Union 2016: Completing the Capital Market Union – Commission 
accelerates reform"; 14 September 2016; IP/16/3001 
4 Public consultation on the operations of the European Supervisory Authorities"; 21/03/2017 – 16/05/2017 

3 

 
 
                                                            
Such  future  adjustments  and  enhancements  in  the  regulatory  set-up  would  also  need  to  be 
appropriately reflected in the pending legislative proposal on CCP Recovery and Resolution, 
referred to above, which brings a more coordinated EU mechanism to respond to the unlikely 
event  of  a  failure  by  a  CCP,  provides  a  toolbox  for  future  resolution  authorities  and  is 
currently  being  discussed  with  the  European  Parliament  and  the  Council.  The  Commission 
stands ready to engage with the co-legislators on this important matter. 

Third-country CCPs 

Clearing  markets  are  closely  integrated  internationally.  This  is  particularly  relevant  as, 
following the foreseen withdrawal of the United Kingdom from the EU, a substantial volume 
of transactions denominated in euro would cease to be cleared in the EU and would no longer 
be  subject  to  EMIR  and  the  EU  supervisory  architecture.  Derivatives  denominated  in  some 
other Member State currencies are also cleared in the UK.  

The  Commission  remains  committed  to  integrated  financial  markets,  its  international 
obligations, and the possibility of equivalence for CCPs, and is conscious of the need to avoid 
undue  fragmentation  of  the  global  system.  However,  also  taking  into  account  as  necessary 
relevant experience from other jurisdictions, specific arrangements based on objective criteria 
will become necessary to ensure that, where CCPs play a key systemic role for EU financial 
markets  and  directly  impact  the  responsibilities,  including  financial  stability  and  monetary 
policy,  of  EU  and  Member  State  institutions  and  authorities,  they  are  subject  to  safeguards 
provided by the EU legal framework. This includes, where necessary, enhanced supervision at 
EU level and/or location requirements. 

4/ Conclusion 

In light of the considerations set out in this Communication and after offering the opportunity 
for stakeholder feedback on the basis of the present Communication, and subject to an impact 
assessment,  the  Commission  will  present  further  legislative  proposals  in  June  to  ensure 
financial  stability  and  the  safety  and  soundness  of  CCPs  that  are  of  systemic  relevance  for 
financial markets across the EU and to support the further development of the Capital Markets 
Union (CMU).  

4