COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority) and amending Regulation (EU) No 648/2012 as regards the procedures and authorities involved for the authorisation of CCPs and the requirements for the recognition of third-country CCPs
Date: 2017-06-13
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: EU office or agency, European System of Central Banks, capital market, central bank, financial control, financial instrument, financial legislation, financial transaction, market supervision, third country

EN 

   EN 

   EUROPEAN COMMISSION  Strasbourg, 13.6.2017  SWD(2017) 246 final   COMMISSION STAFF WORKING DOCUMENT  IMPACT ASSESSMENT  Accompanying the document Proposal for a Regulation of the European Parliament and of the Council  amending Regulation (EU) No 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority) and amending Regulation (EU) No 648/2012 as regards the procedures and authorities involved for the authorisation of CCPs and the requirements for the recognition of third-country CCPs   {COM(2017) 331 final} {SWD(2017) 247 final}  
 
 
Table of contents 

GLOSSARY AND LIST OF ABBREVIATIONS USED .................................................. 4 

1. 

INTRODUCTION AND RATIONALE ..................................................................... 7 

2.  BACKGROUND AND POLICY CONTEXT .......................................................... 12 

2.1.  The key role of CCPs in the financial system ................................................. 12 
2.2.  CCPs  have  increased  in  size  following  post-crisis  regulatory  reforms  -  and 
continue to grow in importance ....................................................................... 13 
2.3.  The CCP landscape: concentration, integration and interconnectedness ........ 18 
2.4.  The current supervisory arrangements under EMIR ....................................... 26 
2.5.  Relevant international standards and EU initiatives on CCPs ......................... 30 

3.  PROBLEM DEFINITION ........................................................................................ 33 

3.1.  Analysis of current EMIR supervisory arrangements ..................................... 33 
Inconsistency in the arrangements for supervision of EU-based CCPs and role 
3.2. 
of the CBI ........................................................................................................ 36 
Insufficient mitigation of third-country CCP risks .......................................... 42 
3.3. 
3.4.  Potential risks from inaction ............................................................................ 48 

4.  OBJECTIVES ........................................................................................................... 51 

4.1.  Subsidiarity ...................................................................................................... 51 
4.2.  Objectives ........................................................................................................ 51 
4.3.  Consistency of the objectives with other EU policies ..................................... 52 
4.4.  Consistency of the objectives with fundamental rights ................................... 54 

5.  POLICY OPTIONS AND ANALYSIS OF THEIR IMPACT ................................. 54 

5.1.  Baseline scenario ............................................................................................. 54 
5.2.  Options for improving the consistency of supervisory arrangements for CCPs 
established in the EU ....................................................................................... 55 
5.3.  Mitigation of third-country CCP risks ............................................................. 60 

6.  OVERALL IMPACT OF THE PACKAGE ............................................................. 70 

6.1.  Small and medium-sized enterprises ............................................................... 72 
6.2.  Administrative burden ..................................................................................... 73 
6.3.  EU budget ........................................................................................................ 73 
6.4.  Social impacts .................................................................................................. 73 
Impact on third countries ................................................................................. 74 
6.5. 
6.6.  Environmental impacts .................................................................................... 74 

7.  MONITORING AND EVALUATION ..................................................................... 74 

ANNEX 1: OVERVIEW OF CHANGES ADDRESSING THE RECOMMENDATIONS 
OF REGULATORY SCRUTINY BOARD (RSB) ................................................... 76 

ANNEX  2:  OVERVIEW  OF  THE  DERIVATIVES  MARKET  AND  OF  THE  CCP 
LANDSCAPE ........................................................................................................... 77 

ANNEX 3: PROCEDURAL INFORMATION ................................................................ 85 

ANNEX 4: STAKEHOLDER CONSULTATION ........................................................... 87 

 
 
ANNEX 5: WHO IS AFFECTED BY THE INITIATIVE AND HOW? ......................... 95 

ANNEX  6:  ANALYSIS  OF  THE  CURRENT  FUNCTIONING  OF  SUPERVISORY 
COLLEGES ............................................................................................................... 96 

3 

 
 
 
 
GLOSSARY AND LIST OF ABBREVIATIONS USED 

Glossary 

Central Counterparty (CCP) 

Clearing 

Clearing member/direct participant 

Collateral 

Counterparty credit risk 

Credit risk 

A legal person that interposes itself between the 
counterparties to the contracts traded on one or 
more  financial  markets,  becoming  the  buyer  to 
every seller and the seller to every buyer. 

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 
those positions. 

An  undertaking  which  participates  in  a  CCP 
and  which  is  responsible  for  discharging  the 
that 
financial 
participation. 

obligations 

arising 

from 

the  collateral  provider 

An asset or third-party commitment that is used 
to  secure  an 
by 
obligation  to  the  collateral  taker.  Collateral 
arrangements  may  take  different  legal  forms; 
collateral may be obtained using the method of 
title transfer or pledge. 

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 (principal 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 
issuers  of 
risk.  Credit  risk  can  arise  on 
securities 
investment 
the  company’s 
portfolio),  debtors 
(e.g.  mortgagors),  or 
counterparties  (e.g.  on  derivative  contracts,  or 
deposits)  and  intermediaries,  to  whom  the 
company has an exposure. 

(in 

4 

 
Margin (initial/variation) 

Non-Financial Counterparty (NFC) 

OTC 

OTC derivative 

a 

to 

on 

counterparty 

An  asset  (or  third-party  commitment)  that  is 
ensure 
accepted  by 
performance  on  potential  obligations  to  it  or 
cover  market  movements 
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. 

An  undertaking  established  in  the  European 
Union  that  is  not  a  CCP  or  a  financial 
counterparty,  as  defined  in  Article  2(9)  of 
EMIR.  The 
requirements  of  EMIR  vary 
depending  on  the  profile  of  a  non-financial 
counterparty.   
In  determining  whether  an  NFC  should  be 
subject  to  the  clearing  obligation,  EMIR  gives 
consideration  to  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 
techniques 
obligation  and 
requirements  where  their  positions  in  non-
hedging  OTC  derivatives  exceed  certain 
thresholds defined by ESMA. 
The thresholds are EUR  1 bn in gross notional 
value for credit and equity derivatives and EUR 
3  bn  for  interest  rate,  foreign  exchange,  and 
commodity  or  other  derivatives.  Once  an  NFC 
surpasses  one  of  these  thresholds  in  any  asset 
class,  it  becomes  subject  to  these  requirements 
across  all  asset  classes.  These  NFCs  are 
commonly  referred  to  as  'NFC+'  as  opposed  to 
NFCs below the threshold which are known as 
'NFC-'. 

risk  mitigation 

The phrase "over-the-counter" (or OTC) 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. 

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. 

5 

 
List of abbreviations used 

CBI 

CDS 

CCP 

CMU 

EMIR 

ESA 

ESCB 

ESMA 

ESRB 

ETD 

IRS 

IRD 

NFC 

OTC 

TR 

Central Bank of Issue 

Credit Default Swaps 

Central Counterparty 

Capital Markets Union 

'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 

European Supervisory Authority 

European System of Central Banks 

European Securities and Markets Authority 

European Systemic Risk Board 

Exchange-Traded Derivatives 

Interest-Rate Swaps 

Interest-Rate Derivative 

Non-Financial Counterparty 

Over The Counter 

Trade Repository 

6 

 
 
 
 
1. 

INTRODUCTION AND RATIONALE  

Use of Central Counterparties (CCPs) required as a response to the financial crisis 

Derivatives contracts are used by financial and non-financial economic actors to manage 
risks related to changes in interest rates, currency fluctuations, the default of a business 
counterpart  etc.  However,  the  opacity  of  derivatives  played  a  key  role  in  the  financial 
crisis and notably the problems encountered by Lehman Brothers, AIG and others.  

In  accordance  with  the  2009  G20  Pittsburgh  agreement 1 to  reduce  the  systemic  risk 
linked  to  extensive  use  of  derivatives,  the  EU  adopted  the  European  Market 
Infrastructure Regulation (EMIR) in 20122. A key pillar of EMIR is the requirement for 
standardised  OTC  derivatives  contracts  to  be  cleared  through  a  Central  Counterparty 
(CCP), which entered into force in December 20153. A CCP is a market infrastructure, 
which reduces systemic risk and enhances financial stability by standing between the two 
counterparties to a derivatives contract (i.e. acting as buyer to the seller and seller to the 
buyer  of  risk)  and  thereby  reducing  the  risk  for  both.  EMIR  also  introduced  strict 
prudential,  organisational  and  business  conduct  requirements  for  CCPs  and  established 
arrangements for their prudential supervision to minimise any risk to users of a CCP and 
underpin systemic stability. Under EMIR, derivatives transactions which are not centrally 
cleared  by  a  CCP  are  subject  to  additional  collateral  requirements  on  the  bilateral 
exposures  reflecting  a  higher  implied  counterparty  risk  and  potentially  higher  risk  to 
systemic stability4. 

CCPs  have  grown  in  importance  since  2012  and  will  expand  further  in  the  coming 
years 

In the five years since the adoption of EMIR, the volume of CCP activity – in the EU 
and  globally  -  has  grown  rapidly  not  only  in  scale  but  also  in  scope.  At  present, 
around  62%  of  the  global  value  of  all  OTC  derivatives  contracts  and  asset  classes 
(interest rates, credit default, foreign exchange, etc.) is centrally cleared by CCPs5, which 
is  equivalent  to  $337  trillion.  About  97%  ($328  trillion)  of  all  centrally-cleared 
derivatives contracts  are  interest-rate  derivatives.  At  the  end  of  2009,  about  36%  of  all 
OTC  interest-rate  derivatives  were  centrally  cleared,  while  the  corresponding  figure  by 
the  end  of  2015  was  60%6.  Central  clearing  has  similarly  gained  in  importance  in  the 
credit  derivatives  (so-called  CDS)  market,  with  the  proportion  of  outstanding  CDSs 
cleared  through  CCPs  increasing  steadily  since  these  data  were  first  reported,  i.e.  from 
10% at the end of June 2010 to 37% at end the end of June 20167. 

1   http://www.g20.utoronto.ca/2009/2009communique0925.html  
2   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.  Available  at  http://eur-lex.europa.eu/legal-
content/EN/TXT/PDF/?uri=CELEX:02012R0648-20170103&qid=1492599335405&from=EN  
3   Commission Delegated Regulation (EU) 2015/2205 of 6 August 2015 supplementing Regulation (EU) 
No  648/2012  of  the  European  Parliament  and  of  the  Council  with  regard  to  regulatory  technical 
standards on the clearing obligation (Text with EEA relevance), OJ L 314, 1.12.2015, p. 13–21. 
4    See Article 11 of EMIR on risk-mitigation techniques for OTC derivative contracts not cleared by a 

CCP. 

5   BIS, Statistical release, OTC derivatives statistics at end-June 2016, November 2016. 
6   See http://europa.eu/rapid/press-release_MEMO-16-3990_en.htm, November 2016. 
7  BIS, Statistical release, OTC derivatives statistics at end-June 2016, November 2016. 

7 

 
                                                 
The rapidly expanding role of CCPs in the global financial system reflects not only the 
introduction  of  central  clearing  obligations  across  different  asset  classes 8 ,  but  also 
increased  voluntary  use  of  central  clearing  amid  growing  awareness  of  the  benefits  of 
central clearing among market participants (clearing obligations have applied only since 
June  2016).  EMIR  requires  certain  interest-rate  derivatives  and  CDSs  to  be  centrally 
cleared in line with similar requirements in other G20 countries9. Bank capital rules have 
been changed to incentivise central clearing and make bilateral clearing a costlier option 
in  relative  terms 10 ,  while  bilateral  transactions  are  subject  to  additional  collateral 
requirements  since  March  2017 11 .  However,  many  entities  now  choose  to  clear 
voluntarily via  a  CCP, even  in the absence  of a  regulatory  requirement,  because  of  the 
cost and/or risk mitigation benefits12. 

The expansion in CCP activity is set to continue in the coming years. Mandatory clearing 
obligations are likely for additional asset classes13 and the incentives to mitigate risks and 
costs  are  likely  to  lead  to  even  more  voluntary  clearing.  The  May  2017  proposal  to 
amend EMIR in a targeted manner, so as to improve its effectiveness and proportionality, 
will reinforce this trend, by creating further incentives for CCPs to offer central clearing 
of  derivatives  to  counterparties14.  Finally,  deeper  and  more  integrated  capital  markets 
following on from Capital Markets Union will further increase the need for cross-border 
clearing in the EU, thus further increasing the importance and the interconnectedness of 
CCPs within the financial system. 

Expanding  role  of  CCPs  raises  concerns  about  the  need  to  upgrade  supervisory 
arrangements under EMIR 

The  growing  importance  of  CCPs  in  the  financial  system  and  the  associated 
concentration  of  credit  risk  in  these  infrastructures  have  drawn  the  attention  of 
governments, regulators, supervisors, central banks and market participants. 

9  

8    FSB,  OTC  Derivatives  Market  Reforms,  Eleventh  progress  report  on  implementation,  August  2016. 
See in particular section 3.2.1 on central clearing of standardised transactions, as well as Appendixes C 
and I for further details.   
In  accordance  with  EMIR,  the  European  Securities  and  Market  Authority  (ESMA)  is  tasked  with 
developing  technical  standards  specifying  the  class  of OTC  derivatives  that  should be subject  to  the 
clearing obligation. ESMA also maintains a public register on the clearing obligation. See p. 8-10 of 
the public register for further details on the clearing obligations: 
https://www.esma.europa.eu/sites/default/files/library/public_register_for_the_clearing_obligation_un
der_emir.pdf  

10    Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 
No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and 
eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures 
to  collective  investment  undertakings,  large  exposures,  reporting  and  disclosure  requirements  and 
amending Regulation (EU) No 648/2012. 

11   Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016, OJ L 340, 15.12.2016, p. 9–

46. 

12   https://www.kfw.de/KfW-Group/Newsroom/Aktuelles/Pressemitteilungen/Pressemitteilungen-

Details_407936.html  

13    ESMA  has  analysed  several  classes  of  interest  rate,  credit,  equity  and  foreign-exchange  OTC 
derivatives and proposed some of them for the clearing obligation. As indicated in the following table, 
ESMA  could  consider  further  clearing  obligations  in  the  future,  including  for  instance  "Equity 
Lookalike/Flexible equity derivatives and CFD" and "ForEx Non-deliverable Forward (NDF)". 
14   Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 
No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting 
requirements,  the  risk-mitigation  techniques  for  OTC  derivatives  contracts  not  cleared  by  a  central 
counterparty,  the  registration  and  supervision  of  trade  repositories  and  the  requirements  for  trade 
repositories. 

8 

 
                                                 
While the scale and scope of centrally-cleared transactions has expanded, the number of 
CCPs  has  remained  relatively  limited.  There  are  17  CCPs  currently  established  in  the 
EU, all of which are authorised under EMIR to offer their services within the jurisdiction 
- although not all CCPs are authorised to clear all asset classes (e.g. only 2 CCPs clear 
credit derivatives, only 2 CCPs clear inflation derivatives15)16. A further 28 third-country 
CCPs have been recognised under EMIR's equivalence provisions, allowing them also to 
offer  their  services  in  the  EU17.  Accordingly,  clearing  markets  are  integrated  across 
the  EU  and  are  highly  concentrated  in  certain  asset  classes.  They  are  also  highly 
interconnected18. 

While increased clearing via properly regulated and supervised CCPs reinforces systemic 
stability overall, the concentration of risk makes the failure of a CCP a low-probability 
but potentially extremely high-impact event. Given the centrality of CCPs to the financial 
system, the increasing systemic importance of CCPs gives rise to concerns. CCPs have 
themselves  become  a  source  of  macro-prudential  risk,  as  their  failure  could  cause 
significant  disruption  to  the  financial  system  and  would  have  systemic  effects.  For 
instance,  mass,  uncontrolled  termination  and  close-out  of  contracts  cleared  by  CCPs 
could lead to liquidity and collateral strains across the market, causing instability in the 
underlying  asset  market  and  the  wider  financial  system.  Like  some  other  financial 
intermediaries, CCPs are also potentially susceptible to “runs” due to clearing members 
losing confidence in the solvency of a CCP. This could create a liquidity shock for the 
CCP  as  it  attempts  to  meet  its  obligations  to  return  the  principal  collateral  (i.e.  initial 
margin).  The  impact  of  a  CCP  failure  due  to  increased  concentration  of  risk  would  be 
amplified  by  a  growing  interconnectedness  between  CCPs  both  directly  and  indirectly 
via their members (usually large global banks) and clients (Table 2 on page 22 illustrates 
how  the  majority  of  global  systemically  important  banks  –  G-SIBs  –  are  clearing 
members of most CCPs including the most systemic ones). 

In response, and  in  line with the  G20 consensus19,  the Commission adopted  a proposal 
for a Regulation on CCP Recovery and Resolution20 in November 2016. The objective of 
this proposal is to ensure that authorities are appropriately prepared to address a failing 
CCP,  safeguarding  financial  stability  and  limiting  taxpayer  costs.  In  the  context  of 
preparing  the  CCP  Recovery  and  Resolution  proposal,  attention  has  been  refocused  on 
the supervisory arrangements for EU and third-country CCPs included in EMIR and the 
extent to which these arrangements can be made more effective five years after adoption 
of the Regulation. 

15   See  ESMA,  Report  EU-wide  CCP  Stress  test  2015,  29  April  2016,  2016/658  and  related  graph  in 

section 3.1 of this impact assessment. 

16   See full list of CCPs established in the EU in table 3 in section 2.3 of this impact assessment. 
17   In accordance with EMIR, ESMA provides a list of the third-country CCPs that have been recognised 
to offer services and activities in the Union.  The third-country CCPs are established in 15 countries 
covered by CCP equivalence decisions adopted by the Commission, including Australia, Hong Kong, 
Singapore, Japan, Canada, Switzerland, South Korea, Mexico, South Africa and the US CFTC, Brazil, 
UAE, Dubai International Financial Centre (DIFC), India and New Zealand.   

18   See section 2.3 of this impact assessment for further details. 
19   At  the  Cannes  summit  of  November  2011;  the  G20  Heads  of  States  and  Government  endorsed  the 
FSB's"Key Attributes of Effective Resolution Regimes for Financial Institutions"(the ‘Key Attributes’ 
KA) as “a new international standard for resolution regimes". See Communiqué G20 Leaders Summit 
– Cannes – 3-4 November 2011, Section 13. 

20  Proposal  for  a  Regulation  of  the  European  Parliament  and  of  the  Council  on  a  framework  for  the 
recovery and resolution of central counterparties and amending Regulations (EU) No 1095/2010, (EU) 
No 648/2012, and (EU) 2015/2365. COM(2016) 856 final. 

9 

 
                                                 
Supervisory arrangements for EU CCPs 

Under EMIR, EU CCPs are currently supervised by colleges of national supervisors, the 
European Securities and Markets Authority (ESMA), relevant members of the European 
System of Central Banks (ESCB), and other relevant authorities (e.g. supervisors of the 
largest  clearing  members,  supervisors  of  certain  trading  venues  and  central  securities 
depositories).  These  colleges  can  have  as  many  as  20  member  authorities  and  rely  on 
coordination  by  the  home-country  authority.  These  arrangements  raise  a  series  of 
concerns. 

  First, the growing concentration of clearing services in a limited number of CCPs, 
and the increase in cross-border activity which that entails, implies that CCPs in 
individual Member States are increasingly relevant for the EU financial system as 
a  whole.  On  this  basis,  the  current  supervisory  arrangements  relying  mainly  on 
the  home-country  authority  (e.g.  the  home-country  authority  is  ultimately 
responsible for important decisions such as the extension of the authorisation or 
the  approval  of  outsourcing  and  interoperability  arrangements)  must  be 
reconsidered. 

  Second,  divergent  supervisory  practices  in  respect  of  CCPs  (e.g.  different 
conditions  for  authorisation  or  model  validation  processes)  across  the  EU  can 
create  risks  of  regulatory  and  supervisory  arbitrage  for  CCPs  and  indirectly  for 
their clearing members or clients. The Commission has drawn attention to these 
emerging  risks  and  the  need  for  more  supervisory  convergence  in  the 
Commission  Communication  on  CMU  of  September  201621 and  in  the  public 
consultation on the operations of the European Supervisory Authorities (ESAs)22, 
both  of  which  drew  attention  to  the  challenges  posed  by  heterogeneous 
supervisory practices. 

  Third,  the  role  of  central  banks  -  as  issuers  of  currency  -  is  not  adequately 
reflected in CCP colleges.  While the  mandates of  central banks and supervisors 
may overlap (in particular in areas such as interoperability, liquidity-risk controls 
etc.),  there  is  a  potential  for  misalignment  when  supervisory  actions  impact  on 
key  responsibilities  of  central  banks  in  areas  such  as  price  stability,  monetary 
policy  and  the  payment  systems.  In  crisis  situations,  such  misalignments  could 
amplify  the  risks  to  financial  stability  if  the  assignment  of  responsibilities 
between authorities remains unclear. 

Supervisory arrangements for third-country CCPs 

Concerns have also arisen in respect of supervisory arrangements for third-country CCPs 
operating  within  the  EU.  Today,  a  significant  amount  of  financial  instruments 
denominated  in  the  currencies  of  the  Member  States  are  cleared  by  recognised  third-
country CCPs. For example, the notional amount outstanding at CME in the US is EUR 
1.8 trillion for euro-denominated interest-rate derivatives, and SEK 348 billion for SEK 
denominated interest-rate derivatives. 

21   Communication on the "State of the Union 2016: Completing the Capital Market Union – Commission 

accelerates reform"; 14 September 2016; IP/16/3001. 

22   Public  consultation  on  the  operations  of  the  European  Supervisory  Authorities";  21/03/2017  – 

16/05/2017. 

10 

 
                                                 
  First,  the  implementation  of  EMIR’s  system  of  equivalence  and  recognition  has 
shown some shortcomings from the perspective of EU regulators, supervisors and 
central banks, in particular as regards ongoing supervision. Once a third-country 
CCP  has  been  recognised,  ESMA  typically  encounters  difficulties  in  accessing 
information from the CCP, conducting on-site inspections of the CCP and sharing 
information with the relevant EU regulators, supervisors and central banks. As a 
result, there is a risk that CCP practices and/or adjustments to risk management 
models go undetected, with important financial-stability implications for the EU 
entities. 

  Second,  the  potential  for  misalignments  between  supervisory  and  central-bank 
objectives  within  colleges  acquires  an  additional  dimension  in  the  context  of 
third-country CCPs where non-EU authorities are involved. 

  Third,  as  within  the  EU,  there  is  a  risk  that  changes  to  the  CCP  rules  and/or 
regulatory  framework  in  a  third-country  which  could  negatively  affect  the 
regulatory  or  supervisory  outcomes  cannot  be  taken  into  account,  leading  to  an 
un-level playing field between EU and third country CCPs and creating scope for 
regulatory  or  supervisory  arbitrage.  There  is  currently  no  mechanism  to  ensure 
that the EU is informed automatically of such changes. 

Such concerns are likely to become more significant in the coming years, as the global 
nature  of  capital  markets  means  that  the  role  played  by  third-country  CCPs  is  set  to 
expand.  With  28  third-country  CCPs  already  recognised  by  ESMA,  a  further  12  CCPs 
from  10  jurisdictions  have  applied  for  recognition23 and  are  awaiting  a  decision  of  the 
Commission as regards the equivalence of their regulatory and supervisory regimes. 

Finally,  and  significantly,  a  substantial  volume  of  euro-denominated  derivatives 
transactions  (and  other  transactions  subject  to  the  EU  clearing  obligation)  is  currently 
cleared via CCPs located in the UK. When the UK exits the EU, there will be a discrete 
shift  in  the  proportion  of  such  transactions  being  cleared  in  CCPs  outside  the  EU's 
jurisdiction  -  exacerbating  the  concerns  outlined  above.  This  implies  significant 
challenges for safeguarding financial stability in the EU. 

In  light  of  these  considerations,  the  Commission  adopted  a  Communication  on  4  May 
2017 on responding to challenges for critical financial market infrastructures and further 
developing the Capital Markets Union24, indicating that "further changes [to EMIR] 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)". 

Need to assess options to improve current supervisory arrangements 

As the EU clearing landscape continues to evolve, the arrangements for crisis prevention 
and management of CCPs must be as effective as possible. EMIR and the Commission 
proposal  for  a  Regulation  on  CCP  Recovery  and  Resolution  are  important  steps  in  this 
regard.  However,  five  years  after  the  adoption  of  EMIR,  there  is  a  need  to  revisit  the 

23   In  accordance  with  ESMA's  indicative  list  of  third-country  CCPs  that  have  applied  for  recognition 

under Article 25 of EMIR.  

24   Communication  from  the  Commission  to  the  European  Parliament,  the  Council,  and  the  European 
Central  Bank  on  Responding  to  challenges  for  critical  financial  market  infrastructures  and  further 
developing the Capital Markets Union, Brussels, 4.5.2017, COM(2017) 225 final.  

11 

 
                                                 
supervisory  arrangements  for  EU  and  third-country  CCPs  in  light  of  the  growing  size, 
complexity  and  cross-border  dimension  of  clearing  in  the  EU  and  globally.  By 
addressing  identified  problems  at  an  early  stage  and  establishing  clear  and  coherent 
supervisory arrangements both for EU and third-country CCPs, the overall stability of the 
EU financial system should be reinforced and the already low probability (but extremely 
high-impact) risk of a CCP failure should be lowered even further. The development of 
the CMU can also be strengthened. 

This  impact  assessment  considers  the  costs  and  benefits  of  possible  amendments  to 
EMIR  so  as  to  address  emerging  challenges  relating  to  the  supervision  of  CCPs 
established  within  the  EU  and  those  from  third  countries.  It  considers  a  number  of 
options,  including  the  establishment  of  a  single  supervisor  for  EU  CCPs,  enhanced 
supervisory  cooperation  for  EU  CCPs,  and  a  system  of  enhanced  implementation  of 
equivalence, additional supervisory requirements and/or location policy for third-country 
CCPs. 

2.  BACKGROUND AND POLICY CONTEXT 

2.1.  The key role of CCPs in the financial system 

CCPs are vital infrastructures for the financial system 

CCPs  are  the  "central  nerve  system"  of  financial  markets.  They  play  a  key  role  in 
mitigating  counterparty  credit  risk  in  transactions  involving  a  range  of  financial 
instruments, thereby contributing to the reduction of systemic risk25. By interposing itself 
between counterparties to transactions in one or more financial markets, a CCP becomes 
the  buyer  to  every  seller  and  the  seller  to  every  buyer.  In  this  way,  CCPs  simplify  the 
network  of  counterparty  exposures  and  lower  the  average  counterparty  credit  risk 
through  multilateral  netting  techniques  (see  Figure  1  below).  These techniques  mediate 
exposures and, as a result, central clearing may also mitigate systemic risk by reducing 
the risk that the default of one or several clearing members propagates from counterparty 
to counterparty. 

Figure  1:  Exposures  network:  from  non-centrally  cleared  to  centrally  cleared 
derivatives 

Source: BIS26 

25   Systemic risk is defined in Article 2(c) of Regulation (EU) No 1092/2010 of the European Parliament 
and  of  the  Council  of  24  November  2010  on  European  Union  macro-prudential  oversight  of  the 
financial  system  and  establishing  a  European  Systemic  Risk  Board  as  “risk  of  disruption  in  the 
financial system with the potential to have serious negative consequences for the internal market and 
the real economy. All types of financial intermediaries, markets and infrastructure may be potentially 
systemically important to some degree.” 

26   "Central 

clearing: 

trends 

and 

current 

issues",  December 

2015, 

available 

at 

http://www.bis.org/publ/qtrpdf/r_qt1512g.htm  

12 

 
 
                                                 
CCPs  are  located  at  the  heart  of  a  complex  network  of  direct  and  indirect  exposures 
within  the  financial  system.  These  exposures  relate  to  a  limited  number  of  clearing 
members of the CCP and a wide array of clients (via the clearing members) and indirect 
clients  (via  the  clients  of  clearing  members)  including  small  financial  companies, 
investment funds or vehicles, insurance companies and non-financial companies. Direct 
CCP  membership  is  concentrated  in  a  limited  number  of  entities,  as  clearing  members 
need  to  meet  minimum  criteria,  notably  in  terms  of  financial  robustness,  operational 
capacity and product expertise. A typical clearing member is a large financial institution 
engaging with CCPs for purposes of trading on their own account and/or on account of 
their clients. 

CCPs clear a wide range of products 

Contracts  cleared  by  CCPs  can  be  outright  purchases  and  sales  of  securities  (bonds  or 
equities), Securities Financing Transactions (including repurchase agreements i.e. repos) 
or financial derivatives, whether listed or OTC. At the end of 2014, almost 40% of CCPs 
globally  were  simultaneously  offering  clearing  services  for  derivatives,  cash  and  SFT 
markets (see Table 1 for product types cleared by CCP by region). This percentage was 
20% in 200627. 

Table 1: Product types cleared by CCPs (percentage of CCPs offering clearing for a 
specific product type in 2014 by jurisdiction) 

Source: BIS28 

Most CCPs operating in the EU also clear several product classes, from listed and OTC 
financial and commodity derivatives to cash equities, bonds and repos. Annex 2 provides 
a  definition  of  derivatives  and  further  detail  on  the  different  products  cleared  by  CCPs 
operating in the EU. 

2.2.  CCPs  have  increased  in  size  following  post-crisis  regulatory  reforms  -  and 

continue to grow in importance 

The  financial  crisis  brought  the  OTC  derivatives  market  to  the  forefront  of  regulatory 
attention. The insolvency of Lehman Brothers, then a major actor in the OTC derivatives 
market,  revealed  important  shortcomings  in  the  market.  Contracts  involving  Lehman 
required  many  years  to  unwind,  complicating  the  process  of  loss  allocation  and 
undermining confidence across the financial system as a whole. The G20 took a leading 

27   Ibid.  
28   "Central clearing: trends and current issues", December 2015, available at 

 http://www.bis.org/publ/qtrpdf/r_qt1512g.htm  

13 

 
 
                                                 
role in seeking to tackle these market shortcomings and in coordinating a global policy 
response.  In  September  2009,  the  G20  leaders  agreed  that  "All  standardised  OTC 
derivatives contracts should be […] cleared through central counterparties by end-2012 
at  latest.  OTC  derivatives  contracts  should  be  reported  to  trade  repositories.  Non-
centrally  cleared  contracts  should  be  subject  to  higher  capital  requirements29".  In  this 
way,  G20-inspired  reforms  have  led  to  the  introduction  of  a  clearing  obligation  for 
standardised OTC derivatives and created incentives for central clearing; this, in turn, has 
increased  the  number  of  centrally-cleared  contracts,  in  particular  for  interest-rate  and 
credit derivatives (see Figure 2). 

Figure 2: Growth of central clearing (notional amounts outstanding by counterparty in 
percent) 

Source: BIS derivatives statistics, November 201630 

Regulators  across  the  globe  have  now  transposed  the  G20  commitment  on  derivatives 
into  their  legal  frameworks.  In  the  EU,  the  adoption  of  EMIR31-  together  with  other 
pieces of EU legislation32, implemented the G20 commitment to increase the resilience 
of  the  OTC  derivatives  market  by  mandating  that  certain  OTC  derivatives  be  cleared 
through CCPs. Similar initiatives were undertaken across G20 jurisdictions, including the 
US  (via  the Dodd-Frank  Wall  Street  Reform  and  Consumer  Protection Act,  which was 
signed into law in July 2010) and several Asian countries (Hong Kong, Japan, Singapore 
and South Korea). These regulatory reforms have driven a major structural change in the 
OTC  derivatives  market  and  significantly  enhanced  the  systemic  importance  of  CCPs. 
CCPs  are  now  managing  huge  volumes  of  OTC  derivatives,  which  are  much  more 

29   http://www.g20.utoronto.ca/2009/2009communique0925.html  
30   "Central  clearing  predominates  in  OTC  interest  rate  derivatives  markets",  BIS  Quarterly  Review, 

December 2016, available at http://www.bis.org/publ/qtrpdf/r_qt1612b.pdf  

31   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, OJ L 201, 27.7.2012, p. 1. 

32   Other  relevant  pieces  of  EU  legislation  include  the  Markets  in  Financial  Instruments  Directive    and 
Regulation (MiFID I, II and MIFIR) and the CRD IV package setting out prudential requirements. 

14 

 
 
                                                 
complex  instruments  than  those  typically  managed  by  CCPs  before  the  post-crisis 
reforms. 

Figure 3: Evolution of the CCP industry 

Source: BIS33 

The  gross  market  value  of  transactions  cleared  by  CCPs  globally  is  now  measured  in 
trillions  of  dollars.  This  reflects  the  introduction  of  central  clearing  obligations  across 
asset classes as well as a broad acceptance of the benefits of central clearing by market 
participants.  The  notional  amounts  of  centrally  cleared  OTC  derivatives  transactions 
outstanding at the end of December 2016 was estimated at USD 283.5 trillion,34 of which 
USD 278.2 trillion was attributable to interest-rate derivatives and USD 4.3 trillion was 
attributable  to  credit  default  swaps.  The  gross  market  value  of  those  derivatives 
represented  USD  4.6  trillion  and  USD  110  billion,  respectively.  For  interest-rate 
derivatives,  76%  of  the  outstanding  notional  amount  was  centrally  cleared,  with  a 
corresponding  share  of  44%  for  credit  derivatives.  The  share  of  centrally-cleared 
transactions in other segments of OTC derivatives markets remains negligible (about 1% 
of  the  outstanding  notional  amount  for  OTC  FX  derivatives  and  equity-linked 
contracts35), mainly due to the absence of a central clearing obligation. However, there is 
a positive trend for central clearing also in these market segments. 

33   "Central clearing: trends and current issues", December 2015, available at 

http://www.bis.org/publ/qtrpdf/r_qt1512g.htm  

34   BIS, Statistical release, OTC derivatives statistics at end-December 2016, on the basis of outstanding 

positions. http://www.bis.org/statistics/derstats.htm?m=6|32|71  

35   There is little benefit to centrally clear FX derivatives as the main risk they pose is settlement risk, a 
risk  better  mitigated  through  payment  and  settlement  systems.  Equity  derivatives  represent  a  very 
small portion of the derivatives market and have the characteristic of not being highly standardised as 
interest rates and credit derivatives can be. 

15 

 
 
 
                                                 
Figure 4: Constituents of the OTC derivatives market as of end-June 2016 

Source: BIS 

Since December 2015, the EU has had requirements in force for certain interest-rate and 
credit  derivatives  to  be  centrally  cleared  (consistent  with  similar  requirements  in  other 
G20 countries)36; mandatory central clearing for other types of derivatives will follow37. 
In  line  with  global  trends,  the  volume  of  OTC  derivatives  transactions,  which  are 
centrally  cleared,  has  risen  sharply.  The  evolution  in  the  volume  of  centrally-cleared 
interest-rate  swap  (IRS)  transactions  is  illustrative  of  this  trend.  The  analysis  of  EMIR 
data indicates that the share of cleared OTC trades for IRS has increased steadily since 
the introduction of the clearing obligation (see Figure 5, which illustrates relative trends 
in  cleared  versus  non-cleared  OTC  IRS  transactions  since  January  2015  for  two  trade 
repositories  DDRL  and  Regis-TR).  The  share  of  centrally-cleared  IRS  was  stable  at 
about 25% in 2015, while it increased to around 35% in the first three quarters of 2016, 
i.e. after the entry into force of the clearing obligation. 

36   Today, the central clearing determination covering OTC interest rate swaps (IRS) related to the Euro, 
the USD, the Yen, and the British Pound has applied to clearing members (as of 21 June 2016) and 
financial counterparties with a volume of activity above a threshold of EUR 8 billion in gross notional 
amounts  of  outstanding  contracts  (as  of  21  December  2016).  For  other  IRS  in  European  currencies 
(Norwegian  Krone,  Polish  Zloty,  and  Swedish  Krona)  and  Credit  Default  Swaps  (CDS),  the 
application has started phasing-in as of February 2017 for clearing members. 

37   The  detailed  compliance  deadlines  for  the  central  clearing  determination  applying  to  various  asset 

classes and to different types of counterparties are available here: 
https://www.esma.europa.eu/sites/default/files/library/public_register_for_the_clearing_obligation_un
der_emir.pdf  

16 

 
 
 
 
 
 
                                                 
 
Figure 5: Cleared versus non-cleared outstanding ITC IRS trades for DDRL and 
Regis-TR (millions of trades, percentage, end-of-month data) 

Source: EMIR data, DDRL and Regis-TR38 

In addition to the clearing obligation, the Commission adopted new regulatory technical 
standards  on  margin  requirements39 in  October  2016.  The  objective  of  these  RTS  is  to 
further mitigate risk in bilateral clearing by imposing higher collateral requirements (as 
agreed by G20) and to strengthen the incentive to move to central clearing.40 The entry 
into  application  of  these  requirements  for  bilateral  transactions  follows  a  phase-in 
schedule, which started on 4 February 2017 for CCP clearing members and continued on 
1  March  2017  for  other  larger  counterparties.  Counterparties  are  required  to  exchange 
two  types  of  collateral  in  the  form  of  margins,  contributing  to  reduce  the  price 
differential between bilateral and centrally-cleared transactions and to establish centrally-
cleared  derivatives  prices  as  the  default  price.  The  higher  collateral  requirement  on 
bilateral  transactions  has  attracted  many  entities  towards  central  clearing,  even  though 
they do not fall within the scope of the EMIR clearing obligation. For instance, in early 
April 2017, Germany's KfW, a development bank exempt from EMIR, indicated that it 
would  begin  centrally  clearing  its  euro-denominated  interest-rate  derivatives  through 
Deutsche  Boerse's  Eurex  Clearing  platform.  KfW  highlighted  that  the  use  of  central 
clearing was justified both by the need to expand the number of its derivatives partners 

38   "Looking back at OTC derivative reforms – objectives, progress and gaps", ECB Economic Bulletin 

Issue 8, 2016, 20.12.2016,  
available at https://www.ecb.europa.eu/pub/pdf/other/eb201608_article02.en.pdf  

39   Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016, OJ L 340, 15.12.2016, p. 9–

46. 

40   These  requirements  follow  international  standards  developed  by  the  BCBS  and  IOSCO.  For  further 

information, see http://www.bis.org/bcbs/publ/d317.htm  

17 

 
 
 
                                                 
and  by  the  benefits  of  central  clearing  from  a  risk  management  perspective 41.  This 
followed  a  similar  move  by  Germany's  sovereign  debt  agency,  Finanzagentur,  which 
began centrally clearing OTC  interest-rate derivatives  through Eurex in late  2016. This 
shift towards voluntary central clearing is likely to lead to further increases in the volume 
of transactions being managed by CCPs. 

2.3.  The CCP landscape: concentration, integration and interconnectedness 

A concentrated and integrated EU CCP landscape 

Most  EU  CCPs  (and  other  market  infrastructures)  were  originally  established  to  serve 
national needs. Today, many of these CCPs provide their services across national borders 
regardless  of  the  currency  denomination.  For  instance,  according  to  recent  data,  about 
75%  of  centrally-cleared  euro-denominated  interest-rate  derivatives  are  cleared  in  the 
United  Kingdom,  mostly  through  SwapClear,  a  service  of  LCH.Clearnet.42 On  a  daily 
basis  SwapClear  clears  about  USD  3  trillion  in  interest-rate  derivatives,  with 
USD 2 trillion  in  US  dollar-denominated  contracts,  and  EUR  475  billion  in  euro-
denominated  contracts  as  the  second  largest  component 43.  These  figures  are  broadly 
confirmed  by  BIS  triennial  data  for  201644.  The  majority  of  interest-rate  derivatives 
denominated  in  EU-currencies  other  than  the  euro  are  also  centrally  cleared  outside  of 
national borders (see section 3.2). 

While the volume of transactions cleared in the EU has increased substantially in recent 
years  and  is  measured  in  trillions  of  USD,  the  number  of  CCPs  remains  limited. 
Currently, there are 17 CCPs45 established in the EU and authorised under EMIR to offer 
clearing services in the EU (see Table 3).46 Some of these EU CCPs are also authorised, 
recognised or registered by third-country authorities to provide clearing services to non-
EU clearing members or trading venues. 

Not all EU CCPs are authorised to clear all asset classes (See Figure 6 for the number of 
EU  CCPs  authorised  to  clear  products  per  asset  classes  between  February  2014  and 
October  2015).  In  the  case  of  some  asset  classes,  there  is  only  a  small  number  of  EU 
CCP offering clearing services (e.g. only one EU CCP clears credit derivatives, only two 
EU CCPs clear inflation-rate derivatives). 

41   "Swaps  clearing 

soars  as  margin 

rules  bite",  Reuters,  6  April  2017,  available  at: 

http://www.reuters.com/article/derivatives-swaps-clearing-soars-as-marg-idUSL5N1HE2IE  

42   Calculation  on  the  basis  of  international  data  from  the  BIS  and  data  published  by  LCH  SwapClear 

(see: http://www.swapclear.com/what/clearing-volumes.html.) 

43   http://www.swapclear.com/what/clearing-volumes.html  as of 15 May 2017 
44   See Table 3.2, BIS Triennial Central Bank Survey 2016, , p. 9, available at: 

http://www.bis.org/publ/rpfxf16irt.pdf  

45   In addition to Table 3, a list of those CCPs and the classes of financial instruments covered by their 

authorisations can be found here: 
https://www.esma.europa.eu/sites/default/files/library/ccps_authorised_under_emir.pdf.  

46   ADD cross reference to table with list. 

18 

 
 
 
 
 
 
                                                 
Figure 6: Number of CCPs authorised to clear products on asset classes 

Source: ESMA, Report EU-wide CCP Stress test 2015, 29 April 2016, 2016/65847 

In  addition  to  EU  CCPs,  a  further  28  third-country  CCPs  have  been  recognised  under 
EMIR's equivalence provisions48, enabling them to offer their services in the EU.49 This 
number is expected to expand as the Commission granted equivalence to six additional 
third-country CCP regimes in December 201650. 

The number of recognised third-country CCPs reflects both the attractiveness of the EU's 
capital  markets  and  the  EU's  commitment  to  integrated  financial  markets  and 
international  standards 51 .  Once  recognition  has  been  granted,  EU  and  non-EU 
counterparties  may  use  a  non  EU-based  CCP  to  clear  OTC  derivatives  as  required  by 
EMIR,  in  the  same  way  as  an  EU  CCP.  Moreover,  a  recognised  third-country  CCP 
becomes  a  Qualifying  CCP  (QCCP)  for  the  purposes  of  the  Capital  Requirements 
Regulation, thereby attracting preferential risk weightings for associated exposures. 

47   ESMA, Report EU-wide CCP Stress test 2015, 29 April 2016, 2016/658, p.65. 
48   Further information on the third-country equivalence regime under EMIR and the related third-country 

CCP recognition provisions is available in section 2.4. 

49   In accordance with EMIR, ESMA provides a list of the third-country CCPs that have been recognised 
to offer services and activities in the Union, including the classes of financial instruments covered by 
the  recognition.  The  28  third-country  CCPs  are  established  in  15  countries  covered  by  CCP 
equivalence decisions adopted by the Commission, including Australia, Hong Kong, Singapore, Japan, 
Canada,  Switzerland,  South  Korea,  Mexico,  South  Africa  and  the  US  CFTC,  Brazil,  UAE,  Dubai 
International Financial Centre (DIFC), India and New Zealand. A list of CCPs established in a third 
country and recognised by ESMA is available in Annex 2. 

50   See European Commission's press release IP-16-4385 of 16 December 2016. These decisions on third-
country  CCP  regime  equivalence  apply  to  India,  Brazil,  New  Zealand,  Japan  Commodities,  United 
Arab Emirates (UAE) and Dubai International Financial Centre (DIFC).  

51   See  G20  Leaders'  St  Petersburg  Declaration  of  September  2013  (paragraph  71):  “We  agree  that 
jurisdictions and regulators should be able to defer to each other when it is justified by the quality of 
their  respective  regulatory  and  enforcement  regimes,  based  on  similar  outcomes,  in  a  non-
discriminatory  way,  paying  due  respect  to  home  country  regulatory  regimes.”,  as  well  as  the  G20 
Leaders' Brisbane declaration of November 2014 (paragraph 12): “We call on regulatory authorities to 
make  further  concrete  progress  in  swiftly  implementing  the  agreed  G20  derivatives  reforms.    We 
encourage  jurisdictions  to  defer  to  each  other  when  it  is  justified,  in  line  with  the  St  Petersburg 
Declaration". 

19 

 
 
 
 
                                                 
Despite having 45 operating CCPs, the sheer volume of transactions now being centrally 
cleared means that central clearing markets are generally concentrated in the EU and are 
highly concentrated in respect of some asset classes. 

Regionally integrated markets 

In  spite  of  the  global  nature  of  the  derivatives  market,  ,  most  CCPs  operate  mainly  as 
regional  or  national  hubs  based  on  the  currencies  of  the  instruments  they  clear.  The 
exceptions  are  a  few  CCPs  offering  services  for  a  broad  range  of  products  to  a  wide 
spectrum  of  clearing  members  and  clients.  These  'global'  CCPs  can,  however,  also  be 
characterised as regional (or even national) hubs for certain instruments which they clear. 
As  a  result,  the  derivatives  market  tends  to  be  highly  concentrated  within  regional 
jurisdictions with instruments being traded and cleared by and between local participants 
in local CCPs. 

As  illustrated  in  a  study  conducted  by  ISDA  over  the  period  2013-2015,  regulatory 
initiatives can also reinforce an existing "regional bias" in clearing for a given derivatives 
market. The study considers the impact on cross-border transactions of the introduction 
of a requirement for electronic trading platforms, which provide access to US persons, to 
register with the US Commodity Futures Trading Commission (CFTC) and comply with 
Swap  Execution  Facilities  (SEF)  rules  from  2  October  2013.  The  first  derivatives 
products  were  mandated  to  trade  on  these  platforms  from  15  February  2014  under  a 
process  known  as  made-available-to-trade  (MAT).  As  a  result,  all  US  persons  are  now 
legally required to trade MAT instruments on SEFs or designated contract markets. The 
analysis indicates that the cleared euro interest rate swaps market is largely fragmented in 
US  and  non-US  liquidity  pools  and  that  this  fragmentation  has  increased  following  the 
entry into force of the SEF rules. This highlights that regulation can strengthen existing 
trends in the structure of derivatives markets. 

Figure 7: The Global Market for Euro IRS: Percentage of Market Share 

20 

 
 
 
Figure 8: The Global Market for USD IRS: Percentage of Market Share 

Source: ISDA52 

The  analysis  also  indicates  that  while  the  notional  volume  of  euro  IRS  transactions 
between  European  counterparties  has  increased,  the  notional  volume  of  trades  between 
European and US counterparties has fallen, both on an absolute basis and in percentage 
terms. This suggests that the regulatory changes have led to a regional shift in the trading 
patterns of both EU and US market participants. 

A high degree of interconnectedness between CCPs and their clearing members 

Partly reflecting market concentration and market integration, CCPs operating within 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, 24 globally systemically important banks (G-SIBs) are members of Eurex, BNP 
Paribas is a member of at least five EU CCPs (see Table 2).53 

52   http://www2.isda.org/attachment/ODM4NQ==/Fragmentation%20FINAL1.pdf   
53   The resolution of financial markets infrastructure, Thomas Huertas, Financial Services Risk Advisory 

Partner, Ernst & Young 

21 

 
 
 
 
 
                                                 
Table 2: Interconnectedness between major CCPs and G-SIBs as of February 2016  

Another way to highlight the degree of interconnectedness between market participants 
active  in  the  OTC  derivatives  market  is  to  focus  on  "who  trades  with  whom".  The 
European Systemic Risk Board (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 (see Figure 9) in the IRS market. The chart 
shows that CCPs, big clearing members (referred to as G16 dealers54) and banks, which 
appear in the core of the chart, are connected to a large number of counterparties, with 
many connections between them, suggesting a high potential for system-wide contagion. 
This  indicates  both  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. 

54   The  group  of  G16  dealers  includes  Bank  of  America,  Barclays,  BNP  Paribas,  Citigroup,  Crédit 
Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, 
Nomura, Royal Bank of Scotland, Société Générale, UBS, and Wells Fargo. 

22 

 
 
 
 
 
 
 
                                                 
Figure 9: Network of gross notional links between counterparties in a subset of the 
interest rate swap (IRS) market 

Source: Jorge Abad, Iñaki Aldasoro, Christoph Aymanns, Marco D’Errico, Linda Fache 
Rousová, Peter Hoffmann, Sam Langfield, Martin Neychev, Tarik Roukny, Shedding light 
on dark markets: First insights from the new EU-wide OTC derivatives dataset, ESRB, 
Occasional Paper Series No 11, September 2016.55 

Second,  CCPs  are  interconnected  because  they  clear  common  trading  venues.  Some 
CCPs  provide  clearing  on  a  cross-border  basis  to  exchanges  or  other  trading  venues  in 
Member States other than the Member State in which they are established. For example, 
Eurex  Clearing  AG  (established  in  Germany)  clears  the  Irish  Stock  Exchange,  Börse 
Berlin  is  cleared  by  the  LCH  Ltd  (established  in  the  UK),  LCH  S.A  (established  in 
France),  EuroCCP  (established  in  the  Netherlands)  and  SIX  x-clear  (established  in 
Switzerland). Participants on the London Stock Exchange are offered a choice of clearing 
services  from  LCH  Ltd.,  EuroCCP  and  SIX  x-clear  for  all  traded  instruments  (except 
Polish and Spanish instruments, which are cleared by EuroCCP and LCH Ltd., and US 
instruments, which are cleared by EuroCCP). European Commodity Clearing established 
in Germany clears commodity markets across the EU and elsewhere. 

Third,  CCPs  can  be  interconnected  via  so-called  interoperability  arrangements  (see 
Figure 10) which allow clearing members of one CCP to clear 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. and CC&G (established in Italy) in various bond 

55   See on p. 18: 

https://www.esrb.europa.eu/pub/pdf/occasional/20160922_occasional_paper_11.en.pdf?c067e1f68ae0
fe23925b88c613c546a8    

23 

 
 
                                                 
markets  and  for  LCH  Ltd.  and  SIX  x-clear  in  some  markets  for  exchange  traded 
derivatives.56 In addition, KELER CCP (established in Hungary) is a clearing member of 
the  European  Commodity  Clearing  and  offers  access  to  clearing  at  ECC  to  its  own 
clearing members.57 

Figure 10: Central Clearing with and without interoperability58 

Source:  Nicholas  Garvin,  Central  Counterparty  Interoperability,  Reserve  Bank  of 
Australia, Bulletin | JUNE Quarter 2012, page 64 

Risks to financial stability 

CCPs  were  originally  designed  to  facilitate  trading  in  securities  and  not  as  “macro-
prudential institutions” with a responsibility to improve the safety and soundness of the 
broader  financial  system.  However,  as  the  OTC  derivatives  market  has  grown  and 
mandatory clearing of these instruments has become a feature of regulation, some CCPs 
have  become  sufficiently  large  and  interconnected  to  be  systemically  important.  The 
economies  of  scale  (due  to  netting  and  diversification  benefits)  attached  to  central 
clearing favour the use of a small number of large CCPs, resulting in a significant risk 
concentration  in  these  infrastructures.  The  financial  resources  of  such  large  CCPs  are, 
however,  not  unlimited.  One  sufficiently  severe  shock  (or  a  collection  of  multiple 
defaults  of  clearing  members)  could  potentially  threaten  their  viability.  Their  financial 
soundness is therefore essential to ensuring the stability of the entire financial system. 

A  CCP  default  would  typically  follow  unforeseen  losses  as  a  result  of  simultaneous 
default  of  several  of  its  members.  The  trigger  could  be  either  from  a  member's 
insolvency,  or  its  insufficient  liquidity  to  meet  a  margin  (or  delivery)  settlement 
obligation.  The  subsequent  knock-on  effects  could  be  quite  far-reaching.  The  link 

56   ESMA, Final report, Possible systemic risk and cost implications of interoperability arrangements, 1 
March 2016, ESMA/2016/328, https://www.esma.europa.eu/sites/default/files/library/2016-328.pdf. A 
table  of  the  interoperability  arrangements  existing  in  the  EU  and  the  products,  trading  venues  and 
Central Securities Depositories and Security Settlement Systems affected by them can be found in the 
annex to that report (pages 30 to 33). 

57   http://www.ecc.de/ecc-en/about-ecc/partners-products/clearing-members  
58   (a) illustrates a trade being novated through a single CCP – after the trade occurs, the CCP transforms 
the  original  trade  contract  into  two  contracts,  one  between  it  and  each  participant;  both  participants 
must be members of the same CCP, as it is necessary to have continuity in the obligations that flow 
from one side of the trade to the other.  
(b)  illustrates  a  trade  being  novated  through  a  CCP  link  (the  link  permits  the  CCPs  to  hold  trading 
obligations  to  each  other)  –  after  a  trade  occurs  between  participants  of  separate  CCPs,  the  trade  is 
novated into three contracts, between each participant and its CCP and between the two CCPs; trades 
that occur between participants of the same CCP take place as they would without the CCP link, i.e. as 
in the left-hand side diagram. 

24 

 
 
                                                 
between  CCPs  and  systemic  risk  is  addressed in  a  commentary  prepared  for  the  ESRB 
and  published  in  201359.  The  commentary  suggests  that  the  risk  concentration  within 
clearing members themselves would build up due to the need for indirect access to CCPs. 
In  addition,  the  large  banking  groups  tend  to  exhibit  significant  overlaps  across  many 
CCP memberships. Thus, a significant cross-section of CCPs and their members could be 
affected by a globally systemic event. To address the potential contagion risks between 
CCPs  as  a  result  of  interoperability  arrangements,  EMIR  specifically  requires  CCPs  to 
identify and manage the risks arising from such arrangements. It also provides for these 
arrangements to be assessed and approved by the competent authorities60. 

If  the  defaulter's  margin  with  the  CCP  is  insufficient  to  cover  its  obligation,  the  CCP 
would have to call upon other financial resources, including its equity and default fund 
and  its  ability  to  call  on  additional  capital  contributions  by  members.  If  all  of  these 
resources  are  exhausted  as  a  result  of  the  default  of  one  or  more  members,  the  CCP 
would default on its obligations to other members and their clients. The failure of a large 
CCP  could  possibly  result  in  spreading  financial  contagion,  as  all  major  financial 
institutions will be interconnected via direct and indirect linkages to CCPs. 

As  noted  above,  a  CCP  could  also  default  due  to  a  lack  of  liquidity.  Just  like  other 
financial  intermediaries,  CCPs  are  potentially  susceptible  to  ‘runs’  due  to  a  loss  of 
confidence  in  their  solvency.  This  could  create  a  liquidity  shock  for  the  CCP  as  it 
attempts to return collateral. For instance, in the event of a member default, the CCP will 
have  to  make  a  timely  payment  to  those  owed  variation  margin  payments.  This  will 
require  the  CCP  to  liquidate  the  collateral  of  defaulters,  and  perhaps  some  of  its  own 
assets.  The  CCP  may  also  attempt  to  borrow  to  meet  its  obligations.  If  such  collateral 
sales  and  borrowings  occur  during  stressed  market  conditions  (which  is  when  a  large 
member default is most likely), the CCP may be unable to raise sufficient funds to meet 
its obligations. 

The cessation of operations of a CCP would deprive market participants of certain basic 
functions, such as trade processing, thereby entailing the shutdown of entire markets with 
knock-on effects. 

So, CCPs are key players in a very large, heavily integrated and interconnected market 
for central clearing of OTC derivatives, which can lead to systemic risk 

Since the crisis, the market for centrally-cleared derivatives has expanded sharply with a 
limited  number  of  CCPs  resulting  in  heavy  concentration  (particularly  for  some  asset 
classes) and high levels of interconnectedness. These trends are set to continue. Further 

59   ESRB,  Macro-prudential  Commentaries,  Central  counterparties  and  systemic  risk,  Lieven  Hermans, 
at: 

Peter  McGoldrick 
Schmiedel, 
https://www.esrb.europa.eu/pub/pdf/commentaries/ESRB_commentary_1311.pdf?c7bdc8da2a559dc3
21fd51018bfc9502  

November 

available 

Heiko 

2013, 

and 

60   In January 2016, the ESRB provided its assessment of interoperability arrangements in response to a 
Commission's  request  and  as  required  by  Article  85(4)  of  EMIR.  The  ESRB  indicates  that  CCP 
interoperability  arrangements  can  have  implications  for  financial  stability  in  two  different  ways.  On 
the one hand, such arrangements can help to contain systemic risks in a situation where a number of 
different CCPs clear the same financial instruments, insofar as they allow intermediaries to hold their 
position  with  one  CCP,  instead  of  “fragmenting”  it  across  different  CCPs.  On  the  other  hand,  CCP 
interoperability  arrangements  can  have  systemic  risk  implications,  since  the  establishment  of 
interoperable  links  introduces  a  significant  element  of  complexity  into  the  overall  risk  management 
system and adds a channel for direct contagion between two or more CCPs. See ESRB Report to the 
European  Commission  on  the  Systemic  Risk  Implications  of  CCP  Interoperability  Arrangements,  
https://www.esrb.europa.eu/pub/pdf/other/2016-01-14_Interoperability_report.pdf 

25 

 
                                                 
mandatory clearing obligations are likely to follow61 and incentives to mitigate risks and 
costs  are  likely  to  lead  to  more  voluntary  central  clearing.  The  May  2017  proposal  to 
amend EMIR in a targeted manner to improve its effectiveness and proportionality will 
also  contribute  to  these  trends,  by  creating  further  incentives  for  CCPs  to  offer  central 
clearing  of  derivatives  to  counterparties  in  order  to  make  the  financial  system  even 
safer.62 Finally,  deeper  and  more  integrated  capital  markets  following  on  from  Capital 
Markets Union are likely to lead to a further increase in cross-border activity in the EU, 
thus further increasing the interconnectedness of the financial system and CCPs. 

While  the  migration  of  OTC  derivatives  transactions  to  CCPs  has  reduced  the  risk  of 
another episode  like the Lehman failure, new risks have emerged that are linked to the 
concentration  of  so  many  transactions  within  a  limited  number  of  separate  but 
interconnected  infrastructures.  Concentration  of  OTC  derivatives  clearing  is  driven  by 
the  nature  of  the  business,  which  is  characterised  by  low  marginal  cost,  economies  of 
scale  and  a  high  premium  on  liquidity  -  all  of  which  promote  the  emergence  of  large 
market providers. Concentration risk in CCPs is not a problem per se, but it necessitates 
that  CCPs  are  superior  risk  managers,  (i.e.  acting  as  risk  poolers  rather  than  gross  risk 
takers63) and that they are adequately regulated and supervised. 

2.4.  The current supervisory arrangements under EMIR 

EMIR establishes different supervisory models for CCPs operating in the EU, depending 
on whether the CCP is established in the EU or outside of the EU. 

Supervisory arrangements for CCPs established in the EU 

EMIR introduced new supervisory arrangements to ensure that CCPs established in the 
EU  are  subject  to  adequate  supervision.  Under  EMIR,  CCP  supervision  is  mainly 
conducted at national level (see figure 11 below). This was a conscious choice of the co-
legislators  at  the  time  of  EMIR's  adoption  in  2012,  in  recognition  of  the  fact  that  any 
fiscal  responsibility  for  managing  a  failing  CCP  remains  at  national level,  even though 
the  impact  of  a  CCP  failure  immediately  could  have  a  cross-border  reach  (at  EU  level 
and  even  beyond).  This  is  illustrated  in  the  following  table  that  compares  stressed 
exposure amounts for LCH Clearnet Ltd and clearing volumes for the SwapClear service 
with the GDP and public debt figures of UK and FR respectively. 

61   EMIR  Article  5  gives  ESMA  an  ongoing  mandate  for  determining  the  asset  classes  subject  to  the 

clearing obligation. 

62   Proposal  for  a  REGULATION  OF  THE  EUROPEAN  PARLIAMENT  AND  OF  THE  COUNCIL 
amending  Regulation  (EU)  No  648/2012  as  regards  the  clearing  obligation,  the  suspension  of  the 
clearing  obligation,  the  reporting  requirements,  the  risk-mitigation  techniques  for  OTC  derivatives 
contracts  not  cleared  by  a  central  counterparty,  the  registration  and  supervision  of  trade  repositories 
and the requirements for trade repositories, COM/2017/0208 final. 

63   See Coeuré (2017) 

https://publications.banque-france.fr/sites/default/files/medias/documents/fsr21_web.pdf  

26 

 
 
 
 
 
 
                                                 
Table  3  –  SwapClear  clearing  volumes  and  LCH  Clearnet  Ltd  stressed  exposures 
compared to UK and FR GDP and public debt 

Benchmark 

LCH Clearnet Ltd 

SwapClear service 

GDP (2015) 

Public 
(2015) 

debt 

CPMI-IOSCO report (Q1 2016) 

Notional  amounts  outstanding 
(as of 12 May 2017) 

UK 

EUR 2.58 
trillion 

EUR 2.27 
trillion 

FR 

EUR 2.18 
trillion 

EUR 2.10 
trillion 

Total 
resources 
OTC 
derivatives 

default 
for 
IR 

Peak 
stressed 
LGD  (12  past 
months) 

EUR 4.04 
billion 

All products 

EUR 269.5 
trillion 

EUR 2.46 
billion 

Interest  Rate 
Swaps 

EUR 128.5 
trillion  

Sources: LCH Clearnet Ltd – SwapClear website; TradingEconomics.com 

On  this  basis,  EMIR  tasks  home  supervisors  with  the  full  supervision  of  CCPs 
established  in  their  Member  State,  including  (1)  the  authorisation  of  the  relevant 
CCP(s)64; and (2) the organisation of a cooperation and information-sharing framework 
among other Member State authorities (supervisors and central banks) within supervisory 
colleges.  Meanwhile,  ESMA  is  allocated  responsibility  for  promoting  supervisory 
convergence and cross-sector consistency, mediating conflicts between authorities within 
the supervisory college, addressing any breaches of EU law, and creating a harmonised 
set of prudential, organisational and conduct of business requirements for CCPs ensuring 
the  adequate  coverage  of 
inherent 
interconnectedness  of  the  clearing  business,  EMIR  recognises  the  need  for  other 
Member-State  authorities  and  ESMA  to  have  a  role  in  the  authorisation  of  a  CCP, 
alongside the home authority (either in a voting capacity for Member-States authorities 
or in a non-voting advisory capacity for ESMA). A blocking mechanism is provided for, 
granting  binding  mediation  powers  to  ESMA  if  the  home  authority  fails  to  obtain  a 
favourable  opinion  of  the  supervisory  college  before  the  authorisation  of  a  CCP.  The 
other  Member  State  authorities  also  act  in  different  capacities  within  the  supervisory 
colleges,  being  responsible  for  the  supervision  of  clearing  members,  CSDs  or  trading 
venues,  being  responsible  for  the  supervision  of  CCPs  with  which  interoperability 
arrangements have been signed. 

to  risks.  Considering 

their  exposures 

the 

EMIR refers specifically to the role of central banks when participating in colleges, both 
as  overseer  of  the  CCP65 and  as  central  bank  of  issue66.  The  role  of  central  banks  is 
closely linked to the tasks attributed to the ESCB under the Treaty to promote the smooth 
operation  of  payments  systems67.  The  participation  of  CBIs  in  a  supervisory  college  is 
determined  by  the  currency  of  denomination  of  the  financial  instruments  cleared.  For 

64   The Member States can entrust National Central Banks with supervisory functions under national law 
as allowed under Article 14.4 of the ESCB Statute. These National Central Banks then act as NCAs. 
This  function  is  different  from  the  function  of  a  central  bank  of  issue  that  is  responsible  for  central 
bank oversight. Both functions are strictly separated within the National Central Banks. 

65   EMIR Article 18(2)(g). 
66   EMIR Article 18(2)(h). 
67   Article 127(2) TFEU. 

27 

 
  
  
  
  
 
                                                 
financial  instruments  denominated  in  the  currency  of  one  of  the  Member  States  of  the 
EU,  the  CBI  is  always  a  member  of  the  European  System  of  Central  Banks  (ESCB), 
i.e. the ECB for the Member States whose currency  is the euro or the relevant national 
central bank for Member States whose currency is not the euro. In order to ensure safe 
and sound transmission channels for monetary policy, the CBI has a genuine interest in 
promoting  the  smooth  operation  of  payment,  clearing  and  settlement  systems,  also 
considering that monetary policy operations typically take the form of central bank credit 
collateralised  by  securities.  In  particular,  the  CBI  should  be  in  a  position  to  safeguard 
price stability, which is closely related to financial stability68. In this context the CBI has 
also normally extensive expertise in these areas. 

Figure 11: Current supervisory arrangements for EU CCPs 

Source: European Commission services 

While  the  current  EMIR  supervisory  arrangements  for  CCPs  established  in  the  EU 
recognise  the  need  for  several  authorities  to  be  involved  in  supervision,  the  relative 
complexity  of  these  arrangements  and  the  tension  between  national  and  cross-border 
supervision  raise  concerns  about  whether  the  assignment  of  responsibilities  between 
authorities and their ability to react swiftly to developments is sufficient to mitigate the 
risks  related  to  the  increasing  concentration,  integration  and  interconnectedness  of  the 
CCP ecosystem. 

Supervisory arrangements for third-country CCPs 

In line with G20 commitments and international standards69, EMIR enables a mechanism 
for CCPs based outside of the EU to provide clearing services to EU counterparties. This 
aims 
to  promote  safe  cross-border  OTC  derivative  transactions,  avoid  market 
fragmentation and regulatory arbitrage. 

68   See  Papademos  (2006)  for  an  extensive  view  of  the  tight  relationship  between  price  stability  and 

financial stability. 
https://www.ecb.europa.eu/press/key/date/2006/html/sp060707.en.html  

69   In light of the global nature of the OTC derivatives market, the FSB encourages jurisdictions that have 
implemented  the  G20  commitments  to  provide  capacity  to  defer  in  some  way  to  other  jurisdictions 
through cross-border arrangements. 

28 

 
 
                                                 
This mechanism is based on a three-step approach. First, the third-country CCP needs to 
apply  to  ESMA  for  recognition.  Second,  the  European  Commission  must  examine  the 
legal and supervisory framework of the third country in which the CCP is established in 
order to assess whether it is equivalent with the requirements laid down in EMIR. There 
are three main criteria to consider: (i) whether the legal and supervisory arrangements of 
a  third  country  ensure  that  CCPs  authorised  in  that  third  country  comply  with  legally 
binding  requirements  that  are  equivalent  to  the  requirements  laid  down  in  Title  IV  of 
EMIR; (ii) whether those CCPs are subject to effective supervision and enforcement in 
the third country on an ongoing basis; and (iii) whether the legal framework of the third 
country  provides  for  an  effective  equivalent  system  for  the  recognition  of  CCPs 
authorised under third-country legal regimes. Based on the outcome of this assessment, 
the European Commission may adopt an equivalence decision. Third, ESMA must then 
be able to assess whether the applying third-country CCP may be recognised.  When a 
third-country CCP has been recognised, the third-country supervisory authorities remain 
primarily responsible for supervision, while ESMA engages in cooperation with them, on 
the  basis  of  bespoke  cooperation  arrangements  (see  Figure  12).  In  contrast  to  the 
supervisory arrangements  for  CCPs  established in the  EU, no specific  competences are 
envisaged for national authorities (supervisors or CBIs) with regard to the recognition or 
supervision of third-country CCPs. 

Figure 12: Current supervisory arrangements for recognised third-country CCPs 

Source: European Commission services 

Other  jurisdictions  can  have  different  approaches  with  a  more  extensive  application  of 
their  requirements  to  CCPs  established  in  a  third  country.  For  example  in  the  US,  the 
Commodity  and  Exchange  Act  and  CFTC  regulations  require  that  third-country  CCPs 
wishing  to  provide  clearing  services  to  trading  venues  established  in  the  US  must  be 
registered with the CFTC and comply with CFTC regulations. In addition, third-country 
CCPs  that  clear  derivatives  with  a  sufficient  nexus  to  US  commerce  must  also  register 
with the CFTC. 

29 

 
 
EMIR's  supervisory  arrangements  for  third-country  CCPs  are  therefore  markedly 
different both from the supervisory system for CCPs established in the EU, since they do 
not provide a role for national supervisors or CBIs, and from the approach of other major 
countries  towards  relations  with  third-countries,  as  they  do  not  establish  requirements 
allowing direct supervision over third-country CCPs. In addition, while the starting point 
of the EMIR supervisory architecture for CCPs established in the EU is that all EU CCPs 
are  of  a  systemic  nature  regardless  of  their  size  or  of  their  activities,  the  third-country 
regime under EMIR does not take into account whether third-country CCPs are systemic, 
as  long  as  the  related  third-country  regime  complies  with  the  equivalence  criteria  laid 
down under EMIR. The combination of these elements raises concerns about whether the 
current equivalence and recognition process for third-country CCPs is sufficiently robust 
to mitigate the potential systemic risks associated with the increasing size, concentration, 
integration and interconnectedness of CCPs. 

2.5.  Relevant international standards and EU initiatives on CCPs 

Relevant international standards for CCPs are insufficient to mitigate systemic risk 

Following the G20 Pittsburgh summit in 2009, as part of an overall move to enhance the 
strength  of  the  global  financial  system,  the  Financial  Stability  Board  (FSB)  was 
established to coordinate at international level the work of national competent authorities 
and international standard setting bodies and to develop and promote the implementation 
of  effective regulatory,  supervisory  and  other  financial  sector  policies in  the  interest  of 
financial stability. 

While the reforms of derivatives markets seek to enhance financial stability by increased 
use of central clearing, fully realising the benefits of central clearing requires CCPs to be 
subject  to  strong  regulatory,  oversight  and  supervisory  requirements.  International 
standard setters, led by the FSB, are therefore working on several initiatives with regard 
to CCPs. In particular, in 2015, global standard-setting bodies launched a comprehensive 
work  plan  on  CCP  resilience,  recovery,  resolution  and  clearing  interdependencies  to 
further enhance the existing framework70. 

With  regard  to  CCP  resilience,  in  April  2012,  the  then  Committee  on  Payments  and 
Market  Infrastructures  (CPMI)  and  Settlement  Systems  (CPSS)  and  the  Technical 
Committee  of  the  International  Organization  of  Securities  Commissions  (IOSCO) 
published  the  Principles  for  Financial  Markets  Infrastructures71 (PFMIs).  According  to 
the  PFMIs,  all  systemically  important  financial  market  infrastructures  (FMIs)  should 
have  comprehensive  and  effective  recovery  plans.  The  PFMI  raises  minimum 
requirements, provides more detailed guidance and broadens the scope of the standards 
to cover new risk management areas for FMIs, including additional detailed guidance for 
CCPs.  CPMI-IOSCO  is  currently  working  on  providing  additional  guidance  on  CCP 
resilience,  work  that  is  yet  to  be  completed  and  not  meant  to  add  any  further 
requirements to the 2012 PFMIs. 

In October 2014, CPMI and IOSCO published a report on Recovery of Financial Market 
Infrastructures,72 which is based on the PFMI and provides guidance to FMIs, including 
CCPs, on how to develop plans to enable them to recover from threats to their viability 
and  financial  strength  that  might  prevent  them  from  continuing  to  provide  critical 

70   For a complete overview, see ECB, Central clearing: reaping the benefits, controlling the risks, April 

2017, https://www.ecb.europa.eu/press/key/date/2017/html/ecb.sp170420_tBdF-FSR21.en.pdf  

71   CPMI and IOSCO (2012), www.bis.org/cpmi/publ/d101.htm 
72   www.bis.org/cpmi/publ/d121.htm  

30 

 
                                                 
services  to  their  participants  and  the  markets  they  serve.  It  also  provides  guidance  to 
relevant authorities in carrying out their responsibilities associated with the development 
and implementation of recovery plans. 

Following  the  financial  crisis  and  G20  commitments  to  end  ‘too  big  to  fail’,  the  FSB 
published its Key Attributes of effective resolution regimes for financial institutions (Key 
Attributes) 73  in  October  2011.  Additional  guidance  on  the  application  of  the  Key 
Attributes  to FMIs  was published in October  2014, in the form of  an  Annex. The FSB 
has led work to develop further guidance on CCP resolution, due to be finalised by the 
time of the G20 Summit in July 2017. In addition, crisis management groups (CMGs) are 
being established for CCPs that are systemically important in more than one jurisdiction.  

Additional  initiatives  of  relevance  also  include  the  work  of  CPMI-IOSCO  on  the 
requirements for qualitative and quantitative disclosure by CCPs74, and the joint work of 
the  Basel  Committee  on  Bank  Supervision  (BCBS),  CPMI  and  IOSCO  on  prudential 
requirements for the exposure of banks to CCPs75. 

EMIR  complies  with  these  international  standards  and  implements  them  into  EU  law. 
The  Commission's  proposal  on  CCP  Recovery  and  Resolution  also  aims  to  integrate 
standards  on  recovery  and  resolution  into  the  EU  framework.  However,  while 
international  standards  help  coordinate  the  policy  response  of  various  jurisdictions  to 
global and cross-border risks, there is no guarantee that these standards will be sufficient 
to  address  the  increasing  concentration,  integration  and  interconnectedness  of  the  CCP 
ecosystem,  as  long  as  these  are  not  implemented  and  enforced  consistently  by 
jurisdictions. This is particularly true in the context of the withdrawal of the UK from the 
EU. 

Related EU initiatives on CCPs do not address EMIR's supervisory arrangements 

EMIR is the only piece of EU legislation establishing direct requirements over CCPs. As 
such,  it  is  the  primary  tool  governing  the  EU's  supervisory  arrangements  for  CCPs 
established within or outside of the EU. 

The  Commission  has  recently  presented  two  proposals  amending  EMIR,  which  aim  to 
address the systemic importance of CCPs on the one hand, and to promote further the use 
of central clearing while keeping costs at a minimum for market participants on the other 
hand. While these proposals are consistent with the ultimate objective of EMIR to reduce 
systemic risk  in  the OTC  derivatives  market,  neither of them  specifically addresses the 
current supervisory arrangements under EMIR. 

First,  the  Commission's  proposal 76  for  a  Regulation  on  CCP  Recovery  and 
Resolution  adopted  in  November  2016  aims  to  ensure  that,  in  the  unlikely  scenario 
where CCPs face severe distress or failure, the critical functions of CCPs are preserved 
while maintaining financial stability and helping to avoid that costs associated with the 
restructuring  and  the  resolution  of  failing  CCPs  fall  on  taxpayers.  While  the  proposal 
seeks to ensure that EU and national authorities are appropriately prepared to address a 
failing CCP,  it mainly focuses  on amendments to help  lower  and mitigate the  systemic 

73   www.fsb.org/wp-content/uploads/r_141015.pdf 
74   http://www.bis.org/cpmi/publ/d125.pdf 
75   http://www.bis.org/publ/bcbs282.pdf 
76  Proposal  for  a  Regulation  of  the  European  Parliament  and  of  the  Council  on  a  framework  for  the 
recovery and resolution of central counterparties and amending Regulations (EU) No 1095/2010, (EU) 
No 648/2012, and (EU) 2015/2365. 

31 

 
 
 
 
 
                                                 
risk  related  to  the  failure  of  CCPs,  through  the  introduction  of  recovery  and  resolution 
measures. The proposal does not include, however, amendments to enhance the ongoing 
supervision  of  CCPs  operating  in  the  EU  in  a  non-crisis  scenario.  Such  amendments 
could nevertheless contribute to strengthening the ability of EU and national authorities 
to  prevent  the  failure  of  CCPs,  in  line  with  the  objective  of  the  CCP  Recovery  and 
Resolution proposal to diminish further the probability of such an event. 

Second, the Commission's proposal for targeted amendments to EMIR77, adopted in 
May  2017,  seeks  to  simplify  certain  EMIR  requirements  and  make  them  more 
proportionate  in  order  to  reduce  excessive  costs  for  market  participants,  without 
compromising  financial  stability.  This  proposal  is  part  of  the  Commission's  2016 
Regulatory Fitness and Performance programme (REFIT)78 to ensure that EU legislation 
delivers results for citizens and businesses effectively and at minimum cost. As such, the 
proposal  focuses  on  issues  where  targeted  amendments  can  help  alleviate  existing 
burdens  without  compromising  EMIR's  objective  of  increasing  financial  stability. 
However, by tackling some of the costs and obstacles associated with access to clearing, 
this  proposal  should  provide  further  incentives  for  market  participants  to  use  central 
clearing – again reinforcing the importance of CCPs within the financial system. 

Third, other relevant EU initiatives relate to the broader European Union framework, and 
may therefore not be sufficiently specific to address the systemic nature of CCPs. They 
consist  of  various  initiatives  related  to  the  overall  EU  financial  services  supervisory 
architecture,  including  the  Commission's  ongoing  efforts  to  further  develop  the 
Capital Markets Union  (CMU), which call for further supervisory convergence at EU 
level to support the development of deeper and better integrated capital markets, and the 
review  of  the  operations  of  the  European  Supervisory  Authorities  (ESAs)79, which 
explores  how  to  strengthen  and  improve  the  effectiveness  and  efficiency  of  the  ESAs. 
the  Staff  Working  Document  (SWD)  on 
Another 
equivalence80,  which  sets  out  DG  FISMA's  experience  with  the  implementation  and 
enforcement  of  third-country  provisions  in  EU  financial  legislation.  While  providing 
examples  of  best  practices  on  how  to  promote  an  effective  and  ongoing  supervision  of 
third-country  entities  within  the  EU's  framework  on  relations  with  third  countries,  the 
SWD mainly takes stock of the current state of play across EU financial legislation and 
does not offer concrete recommendations on the possible way forward for enhancing the 
supervision of third-country CCPs. 

initiative  of  relevance 

is 

There is an urgent need for the EU act to enhance supervision in order to mitigate the 
systemic risks related to CCPs operating in the EU 

As the EU clearing landscape continues to evolve and the role of CCPs expands further 
in the future, the arrangements for crisis prevention and management of CCPs must be as 
effective  as  possible.  International  standard-setting  bodies  are  working  towards 

77   Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 
No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting 
requirements,  the  risk-mitigation  techniques  for  OTC  derivatives  contracts  not  cleared  by  a  central 
counterparty,  the  registration  and  supervision  of  trade  repositories  and  the  requirements  for  trade 
repositories. 

78   See  European  Commission,  REFIT  and  the  10  Priorities  of  the  Commission,  25  October  2016. 

http://ec.europa.eu/atwork/pdf/201621025_refit_scoreboard_summary_en.pdf   

79   "Public consultation on the operations of the European Supervisory Authorities", 21.03.2017, available 

at https://ec.europa.eu/info/finance-consultations-2017-esas-operations_en  

80   "EU equivalence decisions in financial services policy: an assessment", 27.02.2017, SWD(2017) 102 

final, available at  
https://ec.europa.eu/info/sites/info/files/eu-equivalence-decisions-assessment-27022017_en.pdf  

32 

 
 
                                                 
guidelines  to  address  the  inherent  cross-border  nature  of  CCPs.  The  Commission's 
proposal for a Regulation on CCP Recovery and Resolution is also an important step in 
this  regard,  together  with  other  horizontal  EU  initiatives  to  improve  supervisory 
convergence at EU level. 

However,  five  years  after  the  adoption  of  EMIR,  there  is  an  urgent  need  to  revisit  the 
supervisory  arrangements  for  EU  and  third-country  CCPs  in  light  of  the  growing  size, 
interconnectedness and cross-border dimension of clearing in the EU and globally. First, 
the  growth  of  CCPs  in  scale  and  significance  is  expected  to  accelerate  as  recent 
initiatives, including the application of clearing obligations, the margin requirements for 
uncleared  derivatives  and  the  REFIT  proposal  to  make  EMIR  more  efficient  and  more 
proportionate, will further promote the shift towards central clearing. Likewise, the EU's 
exposure to third-country CCP risks is expected to grow as the interconnected nature of 
CCPs increases further, and as additional third-country CCPs apply for recognition. The 
EU's  exposure  to  third-country  CCP  risks  will  also  be  exacerbated  by  the  foreseen 
withdrawal of the UK from the EU in 2019, as this will lead to a shift of risk from within 
to outside the EU. 

It is therefore  necessary for the  EU to move swiftly  to address the concerns relating to 
any shortcomings in the supervisory arrangements for CCPs. By acting at an early stage, 
the  overall  stability  of  the  EU  financial  system  will  be  reinforced  and  the  already  low 
probability  (but  extremely  high-impact)  risk  of  a  CCP  failure  will  be  lowered  even 
further. The development of the CMU will also be strengthened. 

3.  PROBLEM DEFINITION 

This section outlines how the assessment of the effectiveness and efficiency of EMIR's 
current supervisory arrangements for CCPs established in the EU and recognised third-
country CCPs has been carried out. 

Based on the analysis in the previous section and on the outcome of the evaluation of the 
functioning  of  the  colleges  presented  in  Annex  6,  this  section  identifies  the  problems 
with current supervisory arrangements and considers the key issues to be addressed in the 
proposal to amend EMIR. The problems include: (1) incoherence in arrangements for the 
supervision  of  CCPs  established  in  the  EU  and  notably  the  need  for  an  adequate 
reflection  of  the  responsibilities  of  the  CBI;  and  (2)  the  insufficient  mitigation  of  risks 
relating to the operation of recognised third-country CCPs. 

3.1.  Analysis of current EMIR supervisory arrangements 

The  impact  assessment  report  analyses  the  performance  of  the  current  supervisory 
arrangements  of  EMIR,  based  on  the  previous  formal  EMIR  Review  evaluation  and 
additional  available  material,  without  a  formal  evaluation  under  the  Better  Regulation 
principles. 

A  formal  evaluation  of  EMIR  accompanied  the  EMIR  REFIT  proposal  adopted  by  the 
Commission in May 2017. That evaluation focused mainly on the objectives of EMIR to 
increase transparency, reduce counterparty credit risk and mitigate the operational risks 
associated with OTC derivatives. 

33 

 
According to the impact assessment accompanying the 2012 Commission's proposal on 
EMIR81, the general objective of the supervisory requirements for CCPs under EMIR is 
to  increase  the  safety  and  efficiency  of  CCPs  established  in  the  EU.  The  related 
operational  objective  is  to  remove  obstacles  to  the  cross-border  provision  of  CCP 
services in the EU, while the specific objective is to ensure a level-playing field for the 
provision of CCP services, by promoting supervisory convergence. However, that impact 
assessment  did  not  consider  the  third-country  dimension  of  EMIR's  supervisory 
arrangements,  meaning  that  an  evaluation  of  EMIR's  third-country  supervisory  regime 
for equivalence and recognition cannot be carried out against its initial objectives. 

The observation period of how the EMIR supervisory architecture, and more specifically 
the  supervisory  colleges,  works  in  practice,  has  been  relatively  short.  Within  the  EU, 
while the first colleges of supervisors were established in 2013, the authorisation of the 
17  CCPs  established  in  the  EU  spanned  from  the  first  half  of  2014  (Nasdaq  OMX 
Clearing AB) until September 2016 (ICE Clear Europe Limited), with the authorisation 
of  an  18th  CCP  in  Croatia82 still  pending.  Likewise,  the  recognition  of  the  first  third-
country  CCPs  started  as  recently  as  the  first  half  of  201583,  following  the  adoption  of 
corresponding  equivalence  decisions  in  October  2014  (for  the  CCP  regimes  of  Japan, 
Australia, Hong Kong and Singapore). 

While for these reasons no formal evaluation beyond the EMIR  Review evaluation has 
been  carried  out,  this  impact  assessment  report  provides  an  analysis  of  the  extent  to 
which  the  existing  EMIR  supervisory  arrangements  for  CCPs  established  inside  and 
outside the EU have met their objective of ensuring a level-playing field for the provision 
of CCP services in an effective and efficient way, while at the same time being coherent, 
relevant and providing EU added-value. This analysis is largely based on the outcome of 
two peer reviews on the functioning of the supervisory colleges under EMIR conducted 
by ESMA in 201584 and 201685. In addition, this builds on input by ESMA assessing the 
current  EMIR  third-country  equivalence  and  recognition  regime  as  part  of  a  report 
prepared for the Commission in the context of the review of EMIR86. The main findings 
of  the  peer  reviews  carried  out  by  ESMA  are  presented  in  Annex  6,  while  ESMA's 
assessment of the current recognition process under EMIR is presented in Annex 4. On 
the basis of these analyses, of additional feedback from stakeholders available in Annex 
4, and of Commission research, the following preliminary findings can be presented. 

81   Commission  Staff Working Document  Impact  Assessment  Accompanying document  to  the Proposal 
for  a  Regulation  of  The  European  Parliament  and  of  The  Council  on  OTC  derivatives,  central 
counterparties and trade repositories {COM(2010) 484 final} {SEC(2010) 1059}, p.72. Available at: 
http://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1481725916037&uri=CELEX:52010SC1058  
82   For further details, see ESMA's list of Central Counterparties authorised to offer services and activities 

in the Union: 
https://www.esma.europa.eu/sites/default/files/library/ccps_authorised_under_emir.pdf 

83   ESMA's  list  of  CCPs  established  in  a  third  country  that  have  been  recognised  to  offer  services  and 

activities in the Union offers further information: 
https://www.esma.europa.eu/sites/default/files/library/third-country_ccps_recognised_under_emir.pdf 

84   ESMA review of CCP colleges under EMIR, January 2015 

https://www.esma.europa.eu/sites/default/files/library/2015/11/2015-20-
_report_on_esma_review_of_ccp_colleges.pdf  

85   ESMA,  Peer  Review  under  EMIR  Art.  21  Supervisory  activities  on  CCPs’  Margin  and  Collateral 

requirements, 22 December 2016, ESMA/2016/1683 (ESMA peer review 2016) 
https://www.esma.europa.eu/sites/default/files/library/2016-1683_ccp_peer_review_report.pdf 

86   ESMA, EMIR review report no. 4, ESMA input as part of the Commission consultation on the EMIR 

Review, 13 August 2015, ESMA/2015/1254 
https://www.esma.europa.eu/sites/default/files/library/2015/11/esma-2015-1254_-
_emir_review_report_no.4_on_other_issues.pdf 

34 

 
                                                 
Regarding the effectiveness of the EMIR supervisory arrangements applicable to CCPs 
established  in  the  EU,  practical  experience  suggests  that  the  cooperation  between 
members of the colleges in their current structure have allowed the views of supervisors 
of different actors involved in central clearing to be represented, thereby contributing to 
the  objectives  of  supervisory  convergence  and  a  level  playing  field  amongst  CCPs 
established  in  the  EU.  However,  there  are  concerns  about  the  consistency  of  CCP 
supervision  across  Member  States,  suggesting  room  for  a  more  effective  approach  to 
cross-border CCP supervision. In particular the degree of cooperation between members 
of the colleges varies significantly depending on the role of the college in the decision-
making process. While during the authorisation process, "ESMA observed that in general 
the CCP colleges facilitated two-way cooperation: on the one hand, the chairing NCAs 
received good and constructive input from the college members which fed into their risk 
assessments;  while  on  the  other  hand,  college  members  received  the  information  they 
required  in  order  to  vote  on  the  adoption  of  the  joint  opinion."87,  a  reduced  level  of 
cooperation occurs where there is no need for such an opinion. Thus, ESMA sees a "risk 
that  following  authorisation  CCP  colleges  may  become  simply  a  mechanism  for  the 
exchange  of  information,  rather  than  an  effective  supervisory  tool."  In  addition, 
preliminary  observations  suggest  that:  (i)  different  college  members  participate  to 
different  degrees  in  college  discussions;  and  (ii)  the  supervisory  approaches  of  NCAs 
vary  to  a  significant  extent  even  in  cases  involving  comparable  CCPs.  Common 
templates provided by  ESMA  to  support supervisory convergence between  NCAs have 
failed to solve that problem, because NCAs exercise their discretion differently. There is 
therefore room for improvement to help strengthen the consistency of CCP supervision at 
EU level, improve level playing field in the EU and achieve more effective supervisory 
convergence. 

On the effectiveness of supervision of third-country CCPs, the current arrangements have 
allowed  ESMA  to  recognise  28  third-country  CCPs  to  provide  clearing  services  to  EU 
counterparties.  This  is  in  line  with  the  G20's  objectives  to  promote  cross-border 
arrangements.  At  the  same  time,  most  respondents  to  the  EMIR  consultation  (mainly 
companies from the financial sector and industry associations) considered that the EMIR 
equivalence  regime  for  third-country  CCPs  has  de  facto  created  a  situation  where  the 
requirements  for  CCPs  established  in  the  EU  are  heavier  than  third-country  CCPs, 
leading  to  an  un-level  playing  field  which  is  detrimental  to  the  former.  ESMA  also 
highlighted  that  the  EMIR  approach  regarding  third-country  CCPs  is  extremely  open, 
with full reliance on third country rules and supervisory arrangements, while the majority 
of  third-country  jurisdictions  consider  third-country  CCPs  as  systemically  relevant 
infrastructures and apply to them closer scrutiny. ESMA argued that, although the current 
EMIR  approach  should  be  a  model  in  terms  of  mutual  reliance,  if  the  EU  remains  the 
only jurisdiction relying extensively on third country rules and authorities, this might put 
it at risk and does not benefit CCPs established in the EU. 

Regarding efficiency, a majority of respondents to the EMIR consultation supported the 
objective  of  ensuring  a  level  playing  field  between  CCPs  established  in  the  EU  by 
promoting  a  homogeneous  application  of  EMIR.  At  the  same  time,  they  pointed  to  the 
length  of  the  approval  processes,  underlining  that,  in  certain  cases,  the  timeline  for 
approval  could  be  postponed  indefinitely  by  the  NCA,  giving  rise  to  legal  uncertainty. 
Certain respondents also pointed to the need for greater transparency in the functioning 
of  colleges,  not  only  regarding  CCPs  for  the  authorisation  and  extension  of  services 
processes but also regarding users of CCPs in order to allow them to get more visibility 

87   ESMA peer review 2015, p. 16, para. 30. 

35 

 
                                                 
of  the  authorisation  process  and  its  consequences.  Moreover,  several  authorities  and 
industry  participants,  and  market  infrastructure  operators  asked  for  more  clarity  in  the 
process and timeframe for the authorisation and extension of services provided by CCPs. 
Respondents suggested that EMIR should clarify the modalities for the college process, 
in  particular  the  roles  and  responsibilities  of  different  college  members.  There  is 
therefore  room  for  improvement,  in  particular  in  relation  to  a  more  streamlined 
supervision  of  CCPs  established  in  the  EU.  This  could  contribute  to  a  more  efficient 
collaboration between national and EU supervisors, thereby avoiding the duplication of 
supervisory tasks and reducing the corresponding allocation of time and resources. 

Regarding the current supervisory regime for third-country CCPs, industry associations 
that  responded  to  EMIR  consultation  indicated  that  the  Commission  takes  too  long  to 
complete its equivalence assessments. ESMA also raised a series of concerns about the 
efficiency  of  the  process  of  recognition  of  third-country  CCPs.  First,  it  argued  that  the 
process is rigid and burdensome, as demonstrated by the limited number of recognition 
decisions taken in 2015. Second, it pointed out that the recognition of third country CCPs 
imposes a significant administrative burden on ESMA. 

Regarding  relevance,  the  supervisory  arrangements  of  EMIR  remain  integral  to 
international efforts to increase the stability of the global OTC derivatives market, while 
jurisdictions.  EMIR's 
facilitating  cross-border  deference  arrangements  between 
supervisory arrangements also ensure that financial markets continue to play their role in 
contributing to sustainable, long-term growth to further deepen the internal market in the 
interests  of  consumers  and  businesses,  as  part  of  the  Commission's  efforts  to  support 
investments, growth and jobs. 

As  described  in  Section  2,  the  supervisory  arrangements  of  EMIR  are  coherent  with 
other pieces of EU legislation that aim to: (i) address the systemic importance of CCPs; 
(ii)  promote  further  the  use  of  central  clearing,  and  (iii)  enhance  the  efficiency  and 
effectiveness of EU-level supervision, both within and outside the EU. 

Finally, in terms of the EU added value, the supervisory arrangements of EMIR covered 
a gap by introducing a new mechanism facilitating supervisory convergence at EU level 
in  order  to  address  the  systemic  risks  of  CCPs  offering  clearing  services  to  EU 
counterparties. 

3.2.  Inconsistency in the arrangements for supervision of EU-based CCPs and role 

of the CBI 

Concerns have arisen in respect of supervisory arrangements for CCPs established in the 
EU. Annexes 4 and 6 provide detailed feedback from stakeholders and public authorities 
on the current EMIR supervisory arrangements for CCPs established in the EU. 

The central supervisory role of home NCAs does not adequately reflect the increasingly 
pan-European nature of EU CCPs 

Under EMIR, authorisation of a CCP relates to the EU as whole. Authorised CCPs are 
currently  supervised  by  colleges  comprising  the  home-supervisor,  ESMA,  relevant 
members  of  the  ESCB,  and  other  relevant  authorities  (e.g. supervisors  of  the  largest 
clearing  members,  supervisors  of  certain  trading  venues  and  central  securities 
depositories). The central role in these colleges is played by the home-supervisor, which 
coordinates the other participant authorities. However, the increasing scale and scope of 
EU  CCPs,  their  cross-border  integration,  concentration  and  interconnectedness  in  the 
financial system as described earlier point to shortcomings in this arrangement. 

36 

 
In  contrast  to  the  concentration  and  interconnection  in  the  market  for  central  clearing,   
CCP-related supervisory powers across the EU are fragmented. Table 4 below highlights 
the  variations  in  CCP  supervisory  responsibilities  across  Member  States.  Numbers  in 
brackets in the second column refer to the number of CCPs established in that Member 
State.  It  illustrates  that  a  majority  of  Member  States  rely  on  their  financial-market 
authority to supervise EU CCPs, while others rely on central banks, and a few combine 
both types of authorities. 

Table 4: Competent authority for the supervision of EU CCPs under EMIR as 
reported to ESMA 

Designated Competent Authority  Member State (number of EU CCPs in that 

country) 

Number of Member States 
with the particular 
supervisory model 

Central Bank 

CZ (0), IE (0), LT (0), HU (1), 
NL (2), SK (0), UK (4) 

Financial Market Authority 

BU (0), DK (0), DE (2)*, EE (0), EL (1), ES (1), 
HR (1), CY (0), LU (0), MT (0), AT (1), PL (1), 
PT (1), RO (0), SL (0), SE (1) 

Combination of the two above 

BE (0), IT (1), FR (1)** 

Other model 

FI (0)*** 

7 

16 

3 

1 

*  Plus  central  bank  (supervisory  function)  that  performs  some  supervisory  tasks  on  behalf  of  the  financial  market 
authority  
** Plus the prudential authority (ACPR). 
*** Combination of central bank and ministry of finance. 

Source: ESMA88 

Within  a  Member  State,  supervision  can  also  be  carried  out  by  several  national 
competent  authorities  (NCA).  For  instance,  there  are  three  NCAs  in  France  (ACPR, 
AMF and BdF), two NCAs in the Netherlands (AFM, DNB) and two NCAs in Italy (BdI, 
Consob).  In  Germany,  BaFin  is  the  NCA  under  EMIR,  but  the  Deutsche  Bundesbank 
conducts  parts  of  the  ongoing  supervision  and  provides  specialised  inspectors  for  the 
annual on-site inspections on BaFin's behalf.89 As a result, from an EU perspective, there 
are currently 16 NCAs in 12 Member States that supervise the 17 EU CCPs. As well as 
allowing  different  allocation  of  tasks  among  NCAs,  EMIR  allows  Member  States  to 
decide  how  to  entrust  specific  supervisory  powers  to  ensure  that  its/their  NCA(s) 
has/have  "the  supervisory  and  investigatory  powers  necessary  for  the  exercise  of  its 
functions"90. EMIR also leaves to the NCAs the ultimate decision on the authorisation of 
a  CCP  established  in  the  EU  and  other  important  supervisory  decisions  such  as  the 
extension of authorisation, the validation of significant changes to EU CCP risk models 
and parameters or the approval of outsourcings and interoperability arrangements. 

Within  the  EU,  CCPs  are  supervised  by  colleges  of  home  authorities  and  relevant 
authorities  from  other  Member  States.  Colleges  can  comprise  over  20  authorities  with 

88  See https://www.esma.europa.eu/ncas-ccps. According to ESMA's homepage, Latvia did not designate a 

competent authority. 

89   Peer  Review  under  EMIR  Art.  21,  Supervisory  activities  on  CCPs’  Margin  and  Collateral 
requirements, 
ESMA/2016/1683, 
https://www.esma.europa.eu/sites/default/files/library/2016-1683_ccp_peer_review_report.pdf, page 9. 

December 

2016, 

22 

90   Article 22(2) of EMIR. 

37 

 
 
 
 
                                                 
some  (for  example  ESMA  and  the  ECB)  needing  to  refer  to  internal  governing  bodies 
before reaching a position. In order to promote supervisory convergence and to facilitate 
efficient decision-making, EMIR provides ESMA with binding mediation powers in the 
event  of  disagreement  between  the  members  of  the  college  if  a  specified  blocking 
quorum  is  reached.  ESMA  is  also  provided  with  specific  supervisory  tasks  such  as  the 
validation of significant changes of risk management models and parameters. In addition, 
while EMIR provides requirements on the composition of the college(s), the composition 
requirements  do  not  fully  reflect  the  different  functions  of  the  various  authorities  and 
central banks within the colleges. It particularly does not take into account the different 
perspectives  of  supervisory  authorities  (typically  micro-prudential)  and  central  banks 
(typically monetary and macro-prudential). While the mandates of all college participants 
are taken into account, this complex structure does not foster efficient decision-making, 
e.g. there have been instances of long delays for the authorisation of EU CCPs. 

The fragmentation of EU CCP-related supervisory powers makes it difficult to compare 
EU  CCP  practices,  to  supervise  interoperable  or  otherwise  linked  CCPs  and  groups  to 
which  EU  CCPs  in  different  Member  States  belong.  It  is  also  difficult  to  properly 
supervise  areas  which  are  related  to  more  than  one  EU  CCP  e.g.  CCP  links  and 
interoperability  arrangements,  outsourcings  arrangements  or  otherwise  interconnected 
EU  CCPs.  All  these  fields  require  a  revised  and  more  holistic  approach  to  supervision 
across  the  different  EU  CCPs.  The  CMU  Communication  of  September  2016  and  the 
recently  launched  consultation  on  the  review  of  the  European  Supervisory  Authorities 
(ESAs)91 already  draw  attention  to  the  challenges  posed  by  heterogeneous  supervisory 
practices of EU CCPs. 

Diverging supervisory practices can create risks of regulatory arbitrage 

The  fragmented  supervisory  arrangements  under  EMIR  lead  to  differences  in  the 
allocation  and  nature  of  supervisory  powers  depending  on  the  EU  CCP  concerned. 
Notwithstanding ESMA's competence to promote supervisory convergence,92 the powers 
of national supervisors and the requirements for CCPs are interpreted differently across 
the EU resulting in a significant heterogeneity in supervisory practices. In its 2016 CCP 
Peer Review93, ESMA noted the following issues: 

 

 

 

four national supervisors did not complete the annual review under Article 21 of 
EMIR in the respective year94; 

the  approaches  of  the  national  supervisors  to  identifying  new  activities  and 
services  that  require  an  extension  of  the  authorisation  of  the  EU  CCP  under 
Article 15 of EMIR were diverse95; 

the same is true for the validation of significant changes to CCP risk models and 
parameters96. Although a framework for  the  determination of new activities and 

91   Public  consultation  on  the  operations  of  the  European  Supervisory  Authorities";  21/03/2017  – 

16/05/2017 

92   ESMA's work on supervisory convergence is described here: 

https://www.esma.europa.eu/convergence/supervisory-convergence  

93   Peer  Review  under  EMIR  Art.  21,  Supervisory  activities  on  CCPs’  Margin  and  Collateral 

requirements, 22 December 2016, ESMA/2016/1683, 
https://www.esma.europa.eu/sites/default/files/library/2016-1683_ccp_peer_review_report.pdf.  

94   Peer Review Report, page 6. 
95   Peer Review Report, page 7. 
96   Peer Review Report, page 8. 

38 

 
                                                 
  
services  and  the  significance  of  changes  of  risk  models  has  been  promoted  by 
ESMA and agreed among the national supervisors, this did not solve the problem 
of different approaches97. This implies the possibility that a CCP that is located in 
one Member State may be required to go through the authorisation extension or 
validation process before offering a new activity or service, while a CCP located 
in another Member State can offer the same new activity or service without being 
required  to  do  so.  Furthermore,  this  implies  the  risk  that  significant  changes  to 
CCP risk models and parameters may remain unnoticed and would, therefore, not 
be assessed from a risk management perspective; 

 

 

there are different approaches regarding the execution of supervisory tasks by the 
national supervisors, e.g. desk-based reviews and on-site inspections98; 

there are divergences between the national supervisors approach to margin99 and 
collateral100 requirements. In particular, there is a low level of convergence with 
regard  to  portfolio  margining 101  which  is  important  for  the  adequate  risk 
management  in  the  CCP  (i.e.  the  appropriate  collateralisation  considering 
correlations  between  asset  classes)  as  well  as  for  the  efficient  use  of  collateral. 
Such  divergence  can  significantly  influences  the  relative  costs  of  clearing  for 
CCPs. 

Differences  in  interpretation  by  national  supervisors  have  also  been  highlighted  by 
respondents  to  the  EMIR  consultation.  These  include  differences  relating  to  the  EMIR 
requirements for authorisation, risk management, conflicts of interest and the calibration 
of financial resources of EU CCPs. 

While the regional specificity of CCPs within the EU or the specialisation by asset class 
can  make  it  difficult  for  this  arbitrage  possibility  to  manifest  itself,  there  are  several 
instances where two CCPs offering the same clearing services in two different services 
have  been  able  to  leverage  differences  in  supervisory  approaches  or  interpretations  to 
attract business. 

Differences  in  supervisory  approaches  create  issues  of  competition  and  level  playing 
field  between  CCPs  established  in  different  Member  States.  These  differences  can  also 
be  associated  with  a  'race  to  the  bottom'  in  supervisory  quality,  which  would  be 
detrimental to adequate risk management frameworks and practices. This, in turn, creates 
scope  for  regulatory  and  supervisory  arbitrage  among  market  participants.  Additional 
risks include: 

  higher  regulatory  costs  for  clearing  members  and  other  market  participants  as 
they  have  to  deal  with  the  different  interpretation  of  the  law  by  different  EU 
CCPs and their supervisors;  

  possible inadequate collateral requirements;  

  difficulties  in  the  supervision  of  interoperable  or  otherwise  interlinked  CCPs 
where  different  NCAs  are  responsible  for  the  supervision  of  the  EU  CCPs  that 
take part in such arrangements; and 

97   Peer Review Report, page 8. 
98   Peer Review Report, page 10. 
99   Peer Review Report, page 29. 
100   Peer Review Report, page 39. 
101   Peer Review Report, page 22. 

39 

 
                                                 
  difficulties to compare and establish best practices across EU CCPs as each NCA 

is responsible for only one or two EU CCPs. 

In  addition,  the  supervisory  fragmentation  makes  it  difficult  for  market  participants  to 
identify  contact  points,  which  could  be  particularly  problematic  in  stressed  market 
conditions. 

Lack of clarity with respect to the role of the central bank of issue (CBI) 

The overarching public policy objective of a central bank is to maintain the value of, and 
public confidence in, its currency102. In payment, clearing and settlement systems, central 
banks aim mainly to: (i) prevent systemic risk, thereby maintaining financial stability; (ii) 
promote the  efficiency of payment  systems and  instruments; (iii)  ensure the security of 
and  public  trust  in  the  currency  as  the  settlement  asset;  and  (iv)  safeguard  the 
transmission channel for monetary policy. 

Where  systemic  risk  impedes  the  functioning  of  markets  or  threatens  the  existence  of 
solvent critical players, a central bank may need to step in. Assistance can be granted to 
the  market  as  a  whole  or  to  individual  institutions.  Central  banks  decide  on  a  case-by-
case  basis  whether  or  not  to  inject  liquidity  into  the  market  by  means  of  extraordinary 
and/or non-conventional market operations, and whether and how to provide funding to 
individual banks that are illiquid but solvent. The latter is often referred to as “emergency 
liquidity assistance or “acting as the lender of last resort” to banks. 

As issuers of money, the functions of central banks in the area of payment, clearing and 
settlement systems are closely related to their functions in the areas of monetary policy 
and financial stability. On the latter, and with regard to financial market infrastructures, a 
central bank's primary focus is on systemic risk, with a view to ensuring that systems are 
safe and efficient. Were a system to be insufficiently protected against risk, a significant 
disturbance  could  lead  to  its  participants  being  disrupted  or  give  rise  to  systemic 
disruptions in the wider financial system. Systemic importance is determined mainly by 
the size or nature  of  individual transactions  or their aggregate value. Payment, clearing 
and  settlement  systems  specifically handling  large-value  transactions,  as  is  the  case  for 
collateral  underpinning  margin  in  clearing  transactions,  are  normally  considered  to  be 
systemically important. The role and responsibilities of a central bank is to preserve the 
safety  and  efficiency  of  individual  payment,  clearing  and  settlement  systems  or 
arrangements and the safety of the market as a whole (i.e. looking at all infrastructures 
together). 

It  is  important  to  adequately  reflect  the  role  of  CBIs  in  the  supervisory  arrangements 
under  EMIR.  While  the  specific  perspectives  of  supervisory  authorities  and  CBIs  are 
different,  their  overall  interest  in  the  safe  and  sound  functioning  of  a  CCP  naturally 
overlaps  in  several  areas,  such  as  interoperability  arrangements,  liquidity  risk  controls, 
collateral  requirements  and  settlement  questions.  However,  their  objectives  may  not 
always  be  aligned  in  the  context  of  the  central  bank’s  responsibility  in  the  field  of 
monetary  policy.  While  the  CBIs  of  the  most  relevant  currencies  and  the  central  banks 
responsible for the oversight of the CCP and possible interconnected CCPs are – under 
the  current  legal  framework  –  "normal"  college  members 103,  EMIR  does  not  assign 

102   ECB,  Eurosystem,  The  Payment  System  -  Payments,  securities  and  derivatives,  and  the  role  of  the 

Eurosystem, 2010, Chapter 7 on the role of central banks, available at: 
https://www.ecb.europa.eu/pub/pdf/other/paymentsystem201009en.pdf  

103   A particular situation is that of the ECB. According to Article 18(h)(g) and (c) EMIR respectively, the 
ECB  can  be  part  of  a  college  in  the  different  capacities  of  CBI,  ESCB  member  responsible  for 

40 

 
                                                 
 
specific competences to them.  This could lead to a potential misalignment between the 
actions undertaken regarding CCPs and the associated effects on the monetary policy for 
the currencies involved. 

The lack of clarity in the scope of the central bank competences with regard to clearing 
systems has been a longstanding issue. In July 2011, the ECB published on its website 
the Eurosystem104 Oversight Policy Framework (Policy Framework), which described the 
Eurosystem  role  in  the  oversight  of  ‘payment,  clearing  and  settlement  systems’. 
According to the ECB, the oversight of those systems and that infrastructure as a whole 
stemmed  from  the  task  assigned  to  it  of  promoting  the  smooth  operation  of  payment 
systems. 

In  a  judgment  delivered  on  4  March  2015105,  the  General  Court  annulled  the  Policy 
Framework published by the ECB in so far as it set a requirement for CCPs involved in 
the clearing of securities to be located within the Eurozone. Stating that creation of such 
a  requirement  goes  beyond  mere  oversight  by  intervening  in  the  regulation  of  their 
activity,  the  General  Court  held  that  the  ECB  lacks  the  competence  to  adopt  such  a 
requirement106. 

Following  this  judgment,  the  ECB  and  the  Bank  of  England  (BoE)  announced 
measures107 to enhance financial stability in relation to centrally cleared markets within 
the  EU  for  CCPs  with  significant  cross-border  systemic  risk  implications.  These 
included: (i) enhanced arrangements for information exchange and cooperation regarding 
UK CCPs with significant euro-denominated business; and (ii) the extension of the scope 
of their standing swap line in order, should it be necessary and without pre-committing to 
the  provision  of  liquidity,  to  facilitate  the  provision  of  multi-currency  liquidity  support 
by both central banks to CCPs established in the UK and euro area respectively. Both the 
ECB  and  the  BoE  highlighted  that  CCP  liquidity  risk  management  remains  first  and 
foremost the responsibility of the CCPs themselves. 

Need  to  address  inconsistencies  in  current  supervisory  arrangements  for  CCPs 
established in the EU 

The current supervisory arrangements under EMIR are the outcome of a delicate political 
balance,  which  recognises  that  the  fiscal  responsibility  in  the  unlikely  event  of  a  CCP 

oversight and competent authority responsible for the supervision of the clearing members of the CCP 
that are established in the three Member States with the largest contributions to the default fund of the 
CCP  referred  to  in  Article  42  on  an  aggregate  basis  over  a  one-year  period.  In  its  Opinion 
ESMA/2015/838  of  7  May  2015  ESMA  has  considered  that  when  the  ECB  exercises  direct 
supervision over the largest clearing members in accordance with EMIR, it should participate in the 
college in this role. At the same time, ESMA has also opined that when the ECB participates in the 
same college as CBI and/or ESCB member responsible for oversight, it should have only one voting 
right, irrespective of the different roles. A further clarification of the allocation of voting rights is thus 
necessary, also in consideration of the principle of separation in the performance of the ECB tasks as a 
central bank and as a banking supervisor. 

104   The  Eurosystem  comprises  the  European  Central  Bank  (ECB)  and  the  national  central  banks  of  the 

Member States that have adopted the euro as a common currency. 

105   Judgment  of  the  General  Court  (Fourth  Chamber),  4  March  2015,  United  Kingdom  of  Great  Britain 
and  Northern  Ireland  v  European  Central  Bank  (ECB),  Case  T‑496/11,  regarding  the  clearing  of 
http://eur-lex.europa.eu/legal-
financial 
euro, 
found  on  
release  can  be 
content/EN/ALL/?uri=CELEX:62011TN0496.  The 
https://curia.europa.eu/jcms/upload/docs/application/pdf/2015-03/cp150029en.pdf  

available 
at 
related  press 

denominated 

instruments 

in 

106   According to Article 127(2) of the FEU Treaty. 
107   See joint press release of 29 March 2015, available at: 

https://www.ecb.europa.eu/press/pr/date/2015/html/pr150329.en.html  

41 

 
                                                                                                                                                 
failure would lie with the Member State in which the EU CCP is established. While the 
proposal for a framework for the recovery and resolution of CCPs aims at providing the 
necessary  tools  and  powers  to  minimise  the  risk  of  losses  allocated  to  taxpayers,  the 
growing systemic importance of EU CCPs both in terms of size and interconnectedness 
strongly  highlights  inconsistencies  related  to  the  current  allocation  of  responsibilities 
between  EU  and  national  authorities  (including  the  CBI)  in  the  supervision  of  CCPs 
established in the EU. 

3.3.  Insufficient mitigation of third-country CCP risks 

Concerns  have  also  arisen  in  respect  of  supervisory  arrangements  for  recognised  third-
country  CCPs  within  the  EU.  Annexes  4  and  6  provide  detailed  feedback  from 
stakeholders and public authorities on the current EMIR regime for third-country CCPs 
recognised by ESMA to provide their services to EU counterparties and trading venues. 

Singularity of EU supervisory arrangements for third-country CCPs 

The  EU's  approach  to  supervision  of  third-country  CCPs  relies  on  the  capacity  of  the 
third-country home supervisory authority to ensure that the third-country CCP effectively 
complies  with  the  rules  enforced  in  its  jurisdiction.  This  allows  the  EU  to  meet 
international  standards  on  deference to  the  rules  of  a  third  country,  while  ensuring  that 
safeguards related to the equivalence criteria are in place. 

ESMA  has  received  a  large  number  of  applications  for  recognition  from  third-country 
CCPs108.  Third-country  CCPs  have  made  such  applications  so  as  to  be  able  to  provide 
activities  and  services  in  the  EU,  and/or  with  the  objective  of  receiving  the  more 
favourable  QCCP  status  for  their  clearing  members  from  the  perspective  of  the  CRR. 
This  large  interest  for  recognition  demonstrates  the  global  nature  of  the  derivatives 
market and the attractiveness of the EU clearing market, thus highlighting the importance 
of  a  solid  process  to  determine  from  the  EU  perspective  the  list  of  third-country CCPs 
that meet the necessary safeguards to offer their services to EU counterparties. 

The table below provides an overview of existing deference decisions applying to CCP 
regimes amongst FSB jurisdictions. It shows that the EU is one of the jurisdictions with 
the highest number of cross-border CCP arrangements in place. 

Table 5: Central clearing-related deference decisions (FSB member jurisdictions, as 
at end-June 2016) 

Jurisdiction making deference 
decision  

Jurisdiction receiving deference  

Australia  

Canada  

EU  

Hong Kong  

EU, US (CFTC)  

UK, US (CFTC)  

Australia,  Canada,  Hong  Kong,  Japan,  Korea, 
Mexico,  Singapore,  South Africa, Switzerland, 
US (CFTC)  

Australia,  Brazil,  Canada,  EU, 
Singapore, Switzerland and US  

Japan, 

108   A  list  of    third-country  CCPs  that  have  applied  is  available  on  the  ESMA  website  at  the  following 

address: http://www.esma.europa.eu/page/Registries-and-Databases  

42 

 
 
                                                 
Mexico  

Singapore  

US (CFTC)  

Source: FSB109 

US (CFTC)  

UK, US (CFTC)  

Australia, EU, Hong Kong, Japan, Korea  

As described in section 2.3, under EMIR, third-country CCPs are not required to register 
and  become  subject  to  the  rules  and  the  competent  authorities  in  the  EU.  Rather,  they 
must be recognised by ESMA under Article 25. First, CCP must apply for registration by 
ESMA.  Second,  the  Commission  must  adopt  an  implementing  act  determining  the 
equivalence  of  the  third-country  CCP  regime  with  a  number  of  requirements  set  out  in 
EMIR. Third, ESMA must formally recognise the applicant CCP. 

Article 25 of EMIR provides that ESMA may recognise a CCP where the four conditions 
listed in Article 25(2) are met. These conditions are: (i) the adoption of a corresponding 
equivalence  decision  by  the  European  Commission;  (ii)  the  fact  that  the  CCP  is 
authorised  in  the  relevant  third  county  and  is  subject  to  effective  supervision  and 
enforcement ensuring full compliance with the prudential requirements applicable in that 
third  country;  (iii)  the  establishment  of  cooperation  arrangements  between  ESMA  and 
the relevant competent authorities of the third country; and (iv) the fact that the CCP is 
established or authorised in a third country that is not considered by the Commission as 
having  strategic  deficiencies  in  its  national  money  laundering  and  counter  financing  of 
terrorism regime that poses significant threat to the financial system of the EU. 

The cooperation arrangements that ESMA must establish with the relevant supervisors of 
the  third-country  CCP  prior  to  granting  recognition  should  specify  at  least  the 
mechanisms for (a) the exchange of information, (b) the notification to ESMA in case of 
a breach of the conditions of the third-country CCP's authorisation by the home country, 
(c) the notification to ESMA when a CCP is recognised to provide services in the EU and 
most importantly (d) the procedures concerning the coordination of supervisory activities 
including on-site inspections. ESMA should consult with the competent authorities of the 
Member States in which the third-country CCP intends to provide services or in which 
currency services are provided. 

EMIR  also  provides  that  ESMA  may  withdraw  recognition  under  strict  conditions:  (i) 
where  the  formal  conditions  of  recognition  are  no  longer  met;  and  (ii)  in  the  same 
circumstances as those described in Article 20 of EMIR (withdrawal of authorisation). 

Once  it  has  been  recognised,  a  third-country  CCP  continues  to  be  subject  to  its 
jurisdiction's  regime  and  is  supervised  by  its  relevant  supervisor  in  cooperation  with 
ESMA. This means that, in spite of the ex-ante criteria that apply prior to recognition, the 
EUs approach towards third-country CCPs is relatively open, with full reliance on third 
country rules and supervisory arrangements. 

Post-recognition,  the  cooperation  arrangements  that  ESMA  have  concluded  to  date 
provide, however, for only limited powers to ESMA to intervene should an emergency 
situation arise in a third-country CCP. 

Furthermore, once the four conditions of Article 25(2) are met, there is no provision in 
EMIR that allows ESMA to deny recognition on the basis of any material risk emerging 

109  OTC Derivatives Market Reforms / Eleventh Progress Report on Implementation (2016) 

http://www.fsb.org/wp-content/uploads/OTC-Derivatives-Market-Reforms-Eleventh-Progress-
Report.pdf (Since the publication of this report the EU has adopted another six equivalence decisions.) 

43 

 
                                                 
from its review of a CCP application. As a result, as long as the four conditions are met, 
ESMA  has  to  recognise  the  applicant  CCP,  even  though  ESMA  may  identify  a 
significant risk through the processing of an application for a specific third-country CCP, 
or the consulted authorities may flag significant concerns. 

This  approach  contrasts  with  the  approach  to  third-country  CCP  authorisation  of  other 
major jurisdictions. According to ESMA110, the  majority of other jurisdictions consider 
third-country  CCPs  as  systemically  relevant  infrastructures  and  apply  to  them  a  much 
closer  scrutiny.  In  general,  the  process  envisages  a  full  registration  in  the  relevant 
jurisdiction  and  as  part  of  such  authorisation  process,  the  third  country  authority  may 
decide  to  rely  on  certain  rules  of  the  home  jurisdiction  of  the  CCP  and  of  certain 
cooperation  arrangements  with  the  home  authority  of  the  CCPs,  but  the  CCP  would 
become subject to the rules and the authority of the jurisdiction registering it. 

For  instance,  under  the  US  financial  supervisory  regime,  entities  providing  clearing 
services  as  a  CCP  in  the  US  or  to US  market  participants are  required  to  be  registered 
with  either  the  Securities  and  Exchange  Commission  (SEC)  or  the  CFTC,  or  both, 
depending  on  the  type  of  asset  being  cleared.  CCPs  registered  and  supervised  by  the 
CFTC  are  known  as  Derivatives  Clearing  Organizations111 (DCOs).  Section  5b  of  the 
Commodities and Exchange Act (CEA) requires a DCO to register with the CFTC and 
prescribes the Core Principles of US rules with which the DCO must comply in order to 
obtain  and  maintain  its  registration.  There  are  18  Core  Principles.  The  Core  Principles 
address  compliance,  financial  resources,  participant  and  product  eligibility,  risk 
management,  settlement  procedures,  treatment  of  funds,  default  rules  and  procedures, 
rule  enforcement,  system  safeguards,  reporting,  recordkeeping,  public  information, 
information  sharing,  antitrust  considerations,  governance  fitness  standards,  conflicts  of 
interest, composition of governing boards, and legal risk. 

In addition, Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act  gives  the  Financial Stability  Oversight  Council112 the  authority  to  designate certain 
CCPs as systemically important and therefore subject to heightened prudential standards 
and heightened supervision  by the relevant supervisory  agency (the CFTC or  the SEC) 
and by the Board of Governors of the Federal Reserve System. The regime is intended 
for  those  CCPs  which  are,  or  are  likely  to  become,  systemically  important  because  the 
failure of or a disruption to the functioning of the CCP could create, or increase, the risk 
of  significant  liquidity  or  credit  problems  spreading  among  financial  institutions  or 
markets and thereby threaten the stability of the United States financial system. 

Furthermore, instead of a full equivalence approach, the US regime relies on 'substituted 
compliance'  where  DCOs  must  fully  comply  with  the  Core  Principles  before  the  US 
authorities  take  into  account  third-country  requirements.  As  a  consequence  the  US 
requirements always apply. This approach therefore contrasts markedly with that of the 
EU. 

110   EMIR  Review  Report  no.4,  https://www.esma.europa.eu/sites/default/files/library/2015/11/esma-

2015-1254_-_emir_review_report_no.4_on_other_issues.pdf 

111   List of DCOs including CCPs established in the EU: 

https://sirt.cftc.gov/sirt/sirt.aspx?Topic=ClearingOrganizations 
112   https://www.treasury.gov/initiatives/fsoc/about/Pages/default.aspx 

44 

 
 
 
 
                                                 
Shortcomings in supervisory arrangements for third-country CCPs 

ESMA113 has highlighted a number of shortcomings in the current EU regime governing 
third-country CCPs, in particular as regards ongoing supervision. 

  First,  following  the  adoption  of  an  equivalence  decision  and  once  the  formal 
conditions  for  recognition  of  a  third-country  CCP  under  EMIR  are  met,  ESMA 
cannot refuse to grant recognition on the basis of a material risk emerging from 
its review of an application by that CCP. ESMA must therefore recognise a third-
country  CCP,  even  though  it  or  the  consulted  authorities  may  have  identified  a 
significant risk during the processing of the application of that CCP. 

  Second,  while  in  theory  the  equivalence  framework  under  EMIR  should  allow 
ESMA to supervise third-country CCPs while relying on the supervisory regime 
of the third country, in practice it has proven difficult for ESMA to gain access to 
information  directly  from  third-country  CCPs  or  even  from  the  third-country 
competent authorities as well as to exercise its on-site inspection power as on-site 
inspections  must  be  pre-approved  by  the  third-country  competent  authority114. 
Therefore,  although  the  EU  regime  relies  on  cooperation  arrangements  between 
ESMA  and  third-country  supervisory  authorities,  there  is  no  more  direct 
involvement  of  EU  supervisory  bodies  in  the  day-to-day  supervision  of  third-
country CCPs. As a result, there is a risk that third-country CCP practices and/or 
adjustments to risk management models go undetected. 

  Third,  there  is  currently  no  mechanism  to  ensure  that  the  EU  is  informed 
automatically  of  changes 
third-country  CCP  rules  and/or  regulatory 
frameworks  in  third-countries.  There  is  also  a  lack  of  flexibility  in  the  tools 
available  to  ESMA  to  respond  to  such  changes,  i.e.  ESMA  may  only  withdraw 
recognition.  This  leads  to  a  risk  of  regulatory  or  supervisory  arbitrage  at  the 
global level. 

to 

  Fourth, a number of NCAs115 and industry representatives have suggested as part 
of the EMIR consultation that the EU supervisory regime of third-country CCPs 
is less robust than the EU supervisory regime of EU CCPs. On the one hand, EU 
CCPs  must comply  with all relevant EMIR requirements under Titles IV and V 
and are subject to supervision by its NCA(s) and the college defined in Article 18 
which  includes  the  CBIs  of  the  most  relevant  EU  currencies  of  the  financial 
instruments  cleared.  On  the  other  hand,  once  the  Commission  had  adopted  an 
equivalence  decision  and  ESMA  has  recognised  the  third-country  CCP,  the 
supervision of third-country CCPs is based on full reliance on third country rules 
and  supervisory  arrangements,  without  a  possibility  for  EU  authorities  to 
intervene if necessary. As such, respondents to the EMIR consultation, including 
companies  from  the  financial  sector  and  industry  associations,  consider  that  the 
equivalence regime for CCPs as developed in EMIR de facto creates a situation 
where  the  requirements  for  EU  CCPs  are  heavier  than  third-country  CCPs, 
leading to an un-level playing field detrimental to EU CCPs. 

113   EMIR  Review  Report  no.4,  https://www.esma.europa.eu/sites/default/files/library/2015/11/esma-

114

2015-1254_-_emir_review_report_no.4_on_other_issues.pdf  
 See 
19_letter_to_com_-_emir_review_and_sanctioning_powers.pdf  

example: 

for 

115   See NL-DNB, FR-AMF, NL-AFM, FR, ECB 

https://www.esma.europa.eu/sites/default/files/library/esma70-708036281-

45 

 
 
 
 
 
                                                 
Financial  stability  risks  and  monetary  policy  considerations  linked  to  third-country 
CCPs 

EMIR  does  not  allow  CBIs  or  EU  authorities  to  intervene  in  relation  to  financial 
instruments  denominated  in  EU  currencies  which  are  cleared  to  a  significant  extent  in 
CCPs located outside the EU. This raises concerns regarding whether EU authorities are 
adequately positioned to react to a crisis situation such as liquidity stress. 

The  role  of  CBIs  is  particularly  relevant  with  regard  to  CCPs  located  outside  of  their 
jurisdiction and active in the currency they issue because of the CBI's responsibility for 
the  stability  of  its  currency.  By  contrast,  the  mandate  of  the  CBI  of  the  third  country 
where  the  CCP  is  located  accounts  is  focused  on  the  potential  risks  associated  with 
transactions cleared by the CCP that are denominated in its own currency. This may lead 
to  a  misalignment  of  mandates  between  third-country  and  EU  CBIs  related  to  the  fact 
that one CBI may be willing to intervene to stabilise its currency while the other does not 
see the need for such intervention. 

The involvement of the relevant CBIs in the ongoing supervision of third-country CCPs 
is  therefore  essential,  in  particular  for  third-country  CCPs  clearing  large  volumes  of 
transactions  denominated  in  the  currency  issued  by  those  CBIs.  Although  cooperative 
arrangements  have  been  agreed  in  line  with  international  guidance  (see  notably  PFMI 
responsibility  E 116 ),  they  are  of  a  limited  scope  considering  the  monetary  policy 
implications  explained  above.  Consequently,  the  responsibilities  of  EU  CBIs  are  not 
adequately  reflected  with  regard  to  third-country  CCPs  that  offer  clearing  services  for 
financial instruments denominated in the currency of CBIs of the EU Member States. 

The larger the volume of transactions being cleared, the larger the potential risks, and the 
need  for  involvement  of  the  CBI  in  monitoring  and  mitigating  those  risks.  Figure  13 
below  illustrates that  contracts  in  most  currencies  are  more  heavily  traded  outside than 
inside their country, reflecting the market’s global character. The bulk of transactions in 
contracts denominated in currencies as diverse as the Brazilian real, Mexican peso, Swiss 
franc  and  the  euro  are  traded  offshore.  Paradoxically,  the  least  internationalised 
currencies include the British pound and the US dollar, the home currencies of the two 
largest financial centres. 

The United Kingdom dominates  offshore trading in European currencies and the South 
African rand (Figure 14, left-hand panel). Contracts on Latin American interest rates are 
traded mainly in the United States (Figure 14, right-hand panel) and those on Asian rates 
in  Hong  Kong  and  Singapore  (Figure  14,  centre  panel).  But  there  are  exceptions.  The 
United  Kingdom  is  only  slightly  behind  the  United  States  in  trading  derivatives  on 
Brazilian  rates.  The  yen,  the  Australian  dollar  and  the  New  Zealand  dollar  are  more 
heavily  traded  in  the  United  Kingdom  than  in  the  Asian  centres,  although  there  is  also 
significant New Zealand dollar activity in Australia. 

116   The  Principles  For  Market  Infrastructures  (PFMI)  global  standards  that  apply  to  Financial  Markets 
Infrastructures,  including  CCPs.  The  PFMIs  also  outline  the  general  responsibilities  of  relevant 
authorities  for  FMIs  in  implementing  these  standards.  Responsibility  E  relates  to  cooperation  with 
other authorities. See for more information: http://www.bis.org/cpmi/info_pfmi.htm  

46 

 
 
 
 
 
 
 
 
 
                                                 
Figure 13: Onshore and offshore trading, Net-gross basis (adjusted for double 
counting) daily averages in April 2013, in billions of US dollars 

Source: BIS117 

Figure 14: Offshore trading by financial centre (in per cent) 

Source: BIS118 

Increasing exposure of the EU to third-country CCP risks 

Concerns  about  supervisory  arrangements  for  third-country  supervisors  are  likely  to 
become more significant in the future, as the global nature of capital markets means that 
the  role  played  by  third-country  CCPs  is  set  to  expand.  There  are  already  28  third-
country  CCPs  recognised  by  ESMA  and  a  further  12  CCPs  from  10  jurisdictions  have 
applied  for  recognition  and  are  awaiting  a  decision  of  the  Commission  as  regards  the 
equivalence of their regulatory and supervisory regimes. 

Today, a significant amount of financial instruments denominated in the currencies of the 
Member States are cleared by recognised third-country CCPs. For example, the notional 
amount outstanding at CME in the US is EUR 1.8 trillion for euro-denominated interest-
rate derivatives, and SEK 348 billion for SEK denominated interest-rate derivatives. 

117  See: BIS Quarterly Review, December 2013, p. 75, http://www.bis.org/publ/qtrpdf/r_qt1312h.pdf  
118   Ibid, p. 76. 

47 

 
 
 
 
 
 
 
 
 
 
                                                 
Table 6: Notional amount outstanding of OTC IRDs denominated in EUR – March 
2017 (in USD tn) 

CCP 

Notional amount 
outstanding of OTC 
IRD (all currencies)  

% market share 
(all currencies) 

LCH Ltd 
(Swapclear) 

CME US 

JSCC 

EurexOTC  

Nasdaq OMX 

288,5 

16,0 

10.7 

1,2 

0.09 

Source: CCPs' websites  

91% 

5% 

3% 

0,4% 

0% 

% market 
share EUR 

Notional 
amount 
outstanding of 
OTC IRD in 
EUR 

84,3 

97% 

1,8 

0 

0,9 

0 

2% 

0% 

1% 

0% 

Exposure  to  third-country  CCPs  raises  issues  related  to  the  mandate  of  external 
supervision  and  the  management  of  risks  to  financial  stability  in  the  EU.  This  is 
particularly  relevant  in  the  context  of  the  UK  decision  to  leave  the  EU,  and 
consequentially,  removing  UK  CCPs  from  the  EU  legal  framework  governing  those 
CCPs.  The  UK  currently  plays  a  key  role  in  providing  clearing  services  in  Europe 
(e.g. 75% of interest-rate OTC derivatives denominated in euro are currently cleared in 
the  UK,  with  a  daily  turnover  of  $574  billion,  and  $77  billion  of  margin  to  be  held 
against these cleared trades; there is a notional outstanding volume of EUR 84.3 trillion 
in LCH Swapclear alone). In terms of trading alone the last triennial BIS survey shows 
that for EU27 currencies such as the euro, the Polish Zloty or the Swedish Krona, more 
than 80% of transactions in interest-rate derivatives take place in the UK. 

When  the  UK  exits  the  EU,  there  will  be  a  shift  in  the  proportion  of  OTC  derivatives 
transactions  being  cleared  by  third-country  CCPs  outside  the  EU's  jurisdiction  - 
exacerbating the concerns outlined above. This will imply challenges for EU authorities 
in safeguarding financial stability in the EU. 

Need  to  address  incoherence  in  current  supervisory  arrangements  for  third-country 
CCPs 

Several  problems  have  emerged  in  respect  of  supervisory  arrangements  for  recognised 
third-country CCPs and these problems are likely to be exacerbated in the coming years. 
The  growing  role  of  third-country  CCPs  both  in  terms  of  numbers  and  volumes  of 
transactions in EU27 currencies forcefully points to the need for enhanced supervision of 
third-country CCPs. Such enhanced supervision would seem all the more necessary when 
some of the most important EU CCPs are or soon will be established in a third country. 

3.4.  Potential risks from inaction 

A  failure  to  address  the  problems  described  above  relating  to  current  CCP  supervisory 
arrangements both within  and  outside the EU would  undermine  the achievement of the 
EMIR objective of reducing the risks associated with OTC derivatives in two ways. 

  First, NCAs, CBIs and ESMA would not be in an optimal position to prevent the 
risks  related  to  the  failure  of  a  CCP  within  the  EU.  A  CCP  failure  could  have 
major impacts on financial stability and the real economy. 

48 

 
  Second,  the  EU  would  continue  to  lack  the  relevant  tools  to  mitigate  exposure 
from third-country CCP risks. This could facilitate the contagion of systemic risk 
from third countries to the EU, again with potentially major impacts on financial 
stability and the real economy. 

On this basis, it is necessary for the EU to respond in a timely manner and to mitigate the 
risks related to shortcomings in the supervisory arrangements for CCPs. The growth of 
CCPs in scale and significance is expected to continue as recent initiatives, including the 
application of clearing obligations, the margin requirements for uncleared derivatives and 
the REFIT  proposal to make  EMIR  more efficient and more  proportionate,  will further 
promote the shift towards central clearing. Likewise, the EU's exposure to third-country 
CCP  risks  is  expected  to  grow  as  the  interconnected  nature  of  the  global  CCP  market 
further increases, and as additional third-country CCPs apply for recognition. The EU's 
exposure to third-country CCP risks will also be exacerbated by the foreseen withdrawal 
of the UK from the EU, as this will lead to a shift of risk from within to outside the EU. 

In  order  to  address  these  challenges,  action  at  EU  level  is  necessary,  in  line  with  the 
Commission's  Communication  of  4  May  2017  responding  to  challenges  for  critical 
financial  market infrastructures  and further  developing the Capital  Markets  Union. The 
recently-adopted  EMIR  REFIT  proposal  did  not  address  these  issues,  as  it  focused  on 
targeted amendments to simplify EMIR and make it more proportionate, with a view to 
reducing costs for market participants. 

By  addressing  the  identified  problems  at  an  early  stage  and  establishing  clear  and 
coherent  supervisory  arrangements  both  for  EU  and  third-country  CCPs,  the  overall 
stability  of  the  EU  financial  system  will  be  reinforced  and  the  already  low  probability 
(but  extremely  high-impact)  risk  of  a  CCP  failure  will  be  lowered  even  further.

49 

 
Problem tree 

Drivers 

Problems 

Consequences 

Increasing systemic importance of CCPs 
at global level  
- Increase in central clearing 
- Increasing size, degree of CCP 
concentration, integration and 
interconnectedness  

Diverging  CCP  supervisory  practices 
and architecture in the EU  
supervisory  powers 
Fragmentation  of 
within the EU amongst several authorities.  

Lack  of  clarity  regarding  the  scope  of 
supervisory and CBI powers over CCPs  
Suboptimal  allocation  of  responsibilities 
between supervisors and CBIs. 

Suboptimal implementation of 
equivalence and recognition regime for 
third-country CCPs 

Inconsistency in the arrangements for 
supervision  of  EU-based  CCPs  and 
role of the CBI 

Potential  risks  to  the  efficiency  and 
safety of EU CCPs 

Insufficient  mitigation  of 
country CCP risks 

third-

 Increased risks to financial stability 

50 

 
 
 
 
4.  OBJECTIVES 

4.1.  Subsidiarity   

EMIR  is  a  regulation  which  is  binding  in  its  entirety  and  directly  applicable  in  all 
Member States. The legal basis for EMIR is Article 114 of the Treaty on Functioning of 
the European Union ('TFEU') and any changes to it would have the same legal basis.  

EMIR sets out the supervisory framework applying both to CCPs established in the EU 
and to third-country CCPs that provide clearing services to clearing members or trading 
venues  established  in  the  EU.  Under  EMIR,  the  Member  State  of  establishment  of  the 
CCP plays a major role in the supervisory arrangements. However, Member States and 
national  supervisors  cannot  solve  on  their  own  the  systemic  risks  posed  by  highly 
integrated  and  interconnected  CCPs,  which  operate  on  a  cross-border  basis  beyond  the 
scope of national jurisdictions. In addition, Member States cannot mitigate on their own 
risks  arising  from  diverging  national  supervisory  practices.  In  addition,  Member  States 
and national authorities cannot address on their own the systemic risks that third-country 
CCPs can pose to the financial stability of the EU as a whole, 

As such, the objectives of EMIR to increase the safety and efficiency of CCPs by laying 
down  uniform  requirements  for  the  performance  their  activities  cannot  be  sufficiently 
achieved by the Member States and can therefore, by reason of the scale of actions, be 
better achieved at EU level in accordance with the principle of subsidiarity as set out in 
Article 5 of the TFEU. 

4.2.  Objectives 

The  broad  general  objectives  behind  the  initiative  are  (i)  to  safeguard  the  safety  and 
efficiency of EU CCPs and (ii) to enhance financial stability in the EU. 

These can be broken down in the following specific objectives: 

  S1: Enhance CCP supervision and CBI role at EU level (see table A below) 

  S2: Enhance the EU's ability to monitor, identify and mitigate third country risks 

(see table B below) 

Table A: 

Problem 

Problem drivers 

Specific objective 

Increasing  systemic 
CCPs at global level 

importance  of 

Incoherence 
in 
the arrangements 
for 
supervision 
EU-based 
of 
CCPs and role of 
the CBI 

Diverging  CCP  supervisory  practices 
and architecture in the EU  

Enhance CCP supervision 
and CBI role at EU level 

Lack of clarity regarding the scope of 
supervisory  and  CBI  powers  over 
CCPs  

51 

 
 
 
 
 
 
Table B: 

Problem 

Problem drivers 

Specific objective 

Increasing  systemic 
CCPs at global level 

importance  of 

Insufficient 
mitigation 
third-country 
CCP risks 

Lack of clarity regarding the scope of 
supervisory  and  CBI  powers  over 
CCPs  

of 

Enhance the EU's ability to 
monitor, identify and 
mitigate third-country CCP 
risks  

Suboptimal implementation of 
equivalence regime for third-country 
CCPs 

4.3.  Consistency of the objectives with other EU policies 

The  objectives  of  the  initiative  are  consistent  with  a  number  of  other  EU  policies  and 
ongoing initiatives that aim to: (i) address the systemic importance of CCPs; (ii) develop 
the  CMU;  (iii)  enhance  the  efficiency  and  effectiveness  of  EU-level  supervision,  both 
within and outside the EU; and (iv) promote further the use of central clearing. 

‒  First,  this  initiative  is  consistent  with  the  Commission's  proposal 119  for  a 
Regulation on CCP Recovery and Resolution adopted in November 2016. That 
proposal  seeks  to  ensure  that  EU  and  national  authorities  are  appropriately 
prepared to address a failing CCP, maintain financial stability and avoid that costs 
associated  with  the  restructuring  and  the  resolution  of  failing  CCPs  fall  on 
taxpayers.  The  Commission's  proposal  aims  to  ensure  that,  in  the  unlikely 
scenario where CCPs face severe distress or failure, the critical functions of CCPs 
are preserved while maintaining financial stability and helping to avoid that costs 
associated  with  the  restructuring  and  the  resolution  of  failing  CCPs  fall  on 
taxpayers.  The  crisis-management  arrangements  for  recovery  and  resolution  of 
CCPs included in that proposal are based on the existence of the highest quality 
arrangements for crisis prevention (i.e. for CCP regulation and supervision) under 
EMIR.  By  further  enhancing  the  supervision  of  CCPs  under  EMIR,  the 
likelihood,  however  small,  of  needing  to  resort  to  recovery  and  resolution 
measures should be further diminished.  

‒  Second,  it  is  consistent  with  the  Commission's  ongoing  efforts  to  further 
develop the Capital Markets Union ('CMU'). Further supervisory convergence 
of CCPs at EU level can support the development of deeper and better integrated 
capital markets, as more efficient and resilient CCPs are essential elements for the 
well-functioning of CMU. The urgency of further developing and integrating EU 
capital  markets  was  stressed  in  the  Communication  on  CMU  of  September 

119  Proposal  for  a  Regulation  of  the  European  Parliament  and  of  the  Council  on  a  framework  for  the 
recovery and resolution of central counterparties and amending Regulations (EU) No 1095/2010, (EU) 
No 648/2012, and (EU) 2015/2365. 

52 

 
 
 
 
 
 
 
 
 
 
                                                 
2016120.  Conversely,  the  emergence  of  larger  and  more  liquid  financial  markets 
implied  by  CMU  will  result  in  even  more  transactions  being  cleared  via  CCPs, 
and  will  increase  the  systemic  relevance  of  CCPs.  Given  the  potential  for 
increased  volumes  as  well  as  the  current  opportunities  for  regulatory  and 
supervisory  arbitrage  (See  Section  3),  further  enhancements  of  the  supervisory 
framework are required in order to ensure a strong and stable CMU. 

‒  Third,  it  is  consistent  with  the  March  2017  consultation  launched  by  the 
Commission on the operations of the ESAs121, with a view to strengthening and 
improving the effectiveness and efficiency of the ESAs. 

‒  Fourth, it is consistent with DG FISMA's experience with the implementation and 
enforcement of third-country provisions in EU financial legislation, as set out in 
its  Staff  Working  Document  on  equivalence122.  The  Staff  Working  Document 
provides a factual overview of the equivalence process with third countries in EU 
financial  services  legislation.  It  sets  out  DG  FISMA's  experience  with  the 
implementation  and  enforcement  of  third-country  provisions  in  EU  financial 
legislation.  It  also  presents  the  key  aspects  of  equivalence  (e.g.  exercise  of 
empowerments,  assessment,  ex-post  monitoring)  and  provides  more  clarity  on 
how DG FISMA approaches these tasks in practice. 

‒  Fifth, it is consistent with the Commission's proposal123 for an amendment to 
the  Capital  Requirements  Regulation  (CRR)124 adopted  in  November  2016. 
The  proposal  seeks  to  exclude  from  the  calculation  of  the  leverage  ratio 
thresholds the initial margins on centrally-cleared derivative transactions received 
by  clearing  members  in  cash  from  their  clients  and  passed  on  to  CCPs.  It  will, 
therefore, ease access to clearing – as the capital requirements to offer client or 
indirect  clearing  services  will  diminish  –  again  reinforcing  the  importance  of 
CCPs within the financial system. 

‒  Sixth, 

it 

is  consistent  with 

the  Commission's  proposal  for  targeted 
amendments to EMIR125, adopted in May 2017. The proposal seeks to simplify 
certain EMIR requirements and make them more proportionate in order to reduce 
excessive costs for market participants, without compromising financial stability. 

120   "Capital Markets Union - Accelerating Reform", 14.9.2016, COM(2016) 601 final, available at  

https://ec.europa.eu/transparency/regdoc/rep/1/2016/EN/1-2016-601-EN-F1-1.PDF  

121   "Public consultation on the operations of the European Supervisory Authorities", 21.03.2017, available 

at https://ec.europa.eu/info/finance-consultations-2017-esas-operations_en  

122   "EU equivalence decisions in financial services policy: an assessment", 27.02.2017, SWD(2017) 102 

final, available at  
https://ec.europa.eu/info/sites/info/files/eu-equivalence-decisions-assessment-27022017_en.pdf  
123   Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 
No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and 
eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures 
to  collective  investment  undertakings,  large  exposures,  reporting  and  disclosure  requirements  and 
amending Regulation (EU) No 648/2012. 

124  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. 

125   Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 
No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting 
requirements,  the  risk-mitigation  techniques  for  OTC  derivatives  contracts  not  cleared  by  a  central 
counterparty,  the  registration  and  supervision  of  trade  repositories  and  the  requirements  for  trade 
repositories. 

53 

 
 
 
 
 
                                                 
 
This proposal should therefore provide further incentives for market participants 
to  use  central  clearing  –  again  reinforcing  the  importance  of  CCPs  within  the 
financial system. 

This impact assessment considers the interplay between possible amendments to EMIR 
rules and the above pieces of EU legislation and Commission proposals, as well as the 
Commission's broader political priorities. 

4.4.  Consistency of the objectives with fundamental rights 

The  EU  is  committed  to  high  standards  of  protection  of  fundamental  rights  and  is 
signatory  to  a  broad  set  of  conventions  on  human  rights.  In  this  context,  the  proposed 
objectives  as  discussed  above  are  not  likely  to  have  a  direct  impact  on  these  rights,  as 
listed in the main UN conventions on human rights, the Charter of Fundamental Rights 
of  the  European  Union  which  is  an  integral  part  of  the  EU  Treaties,  and  the  European 
Convention on Human Rights ('ECHR'). 

5.  POLICY OPTIONS AND ANALYSIS OF THEIR IMPACT 

This section analyses the policy options for enhancing EU supervisory arrangements for 
CCPs  established  in  the  EU  and  in  third  countries  and  the  impact  of  those  policies  on 
stakeholders.  The  comparative  analysis  reflects  how  the  policy  options  respond  to  the 
problems  identified  in  section  3,  highlighting  the  relative  costs  and  benefits  of  each 
option. The policy options considered are consistent with relatively targeted amendments 
of  EMIR,  which  address  specific  concerns  with  CCP  supervisory  arrangements  due  to 
developments  in  the  market  for  central  clearing  since  the  entry  into  force  of  the 
Regulation and the likely implications of the United Kingdom’s decision to leave the EU. 
The policy options address arrangements for the supervision of CCPs established in the 
EU and for the mitigation of third-country CCP risks. 

The  choice  of  policy  options  to  be  assessed  draws  on  inputs  from  public  and  private 
stakeholders, provided via the public consultation on the EMIR Review, reports received 
pursuant  to  Article  85(1)  of  EMIR  from  ESMA,  ESRB  and  ESCB,  the  public 
consultation  on  the  ESAs  Review,  and  the  public  consultation  on  the  CMU  mid-term 
review.  These  inputs  were  carefully  screened  for  their  relevance  and  feasibility  in 
addressing  the  problems  identified,  while  reinforcing  EMIR's  overall  objective  to 
enhance  financial  stability.  The  policy  options  developed  consist  of  one  or  several 
combined  measures.  To  the  extent  possible,  the  impact  assessment  is  based  on 
quantitative  analysis  but  relies  on  more  qualitative  analysis  when  data  availability  is 
restricted. 

When comparing the policy options, the tables illustrate how each of the policy options 
contributes  to  meeting  the  objectives  in  terms  of  effectiveness  and  efficiency  (cost-
effectiveness) when compared to the 'Do nothing' option. The following schema is used: 
0 (baseline scenario, no policy  change), ++ (strongly  positive  contribution), + (positive 
contribution), 
- (negative  contribution),  ≈ 
(marginal/neutral  contribution),  ?  (uncertain  contribution),  n.a.  (not  applicable)  and  0 
(neutral contribution). 

(strongly  negative  contribution), 

-- 

5.1.  Baseline scenario 

The  baseline  scenario  would  maintain  the  status  quo  and  would  obviously  imply  no 
policy action in respect of EU supervisory arrangements for CCPs established in the EU 
or  for  mitigating  the  risks  from  third-country  CCPs.  This  scenario  would  leave  the 
current supervisory arrangements unchanged so that: 

54 

 
 
(a) CCPs established in the EU would continue to be mainly authorised and supervised 
by  their  home  supervisor  within  a  college  of  other  authorities  responsible  for  ancillary 
aspects. ESMA would retain a binding mediation role in specific cases; and 

(b) third-country CCPs wishing to provide clearing services within the EU would remain 
subject  to  the  current  recognition  process  by  ESMA,  following  the  adoption  of  an 
equivalence decision by the European Commission. 

(c) Under the baseline scenario and absent a pre-agreed arrangement between the EU and 
the United Kingdom when the United Kingdom will effectively leave the EU, all CCPs 
located in the UK would become third-country CCPs which would not be authorised or 
recognised under EMIR and CRR. Although UK CCPs could ask for recognition, which 
could  be  granted  following  an  equivalence  process  determination  by  the  Commission, 
this could take several months or years. Without a timely equivalence determination, this 
would mean that EU counterparties could no longer use UK CCPs to meet their clearing 
obligation under EMIR. There would also be a shift in the proportion of OTC derivatives 
transactions being cleared by third-country CCPs outside the EU's jurisdiction. The basis 
for  bilateral  central  bank  arrangements  that  rely  on  the  current  EMIR  structure,  as 
described in section 3.2, could also change. Cooperation and arrangements arrived at in 
EMIR colleges would no longer be subject to the safeguards and procedures of the EMIR 
Regulation, including the ultimate role of the European Court of Justice. This will imply 
challenges for EU authorities in safeguarding financial stability in the EU. 

The initiatives from international standard setters launched since the entry into force of 
EMIR could contribute to provide further guidance, particularly as far as CCP resilience, 
recovery  and  resolution  are  concerned.  For  instance,  the  work  of  CPMI-IOSCO  on  the 
recovery of CCPs and that of the FSB on resolution of CCPs are both being implemented 
in the EU under the Commission initiative on CCP Recovery and Resolution.  

However,  some  of  these  standards  are  yet  to  be  implemented  in  other  jurisdictions and 
would not in any case address the problems defined in this report as they neither address 
CCP supervision per se nor tackle cross-border issues. Finally, while the implementation 
of such new or forthcoming  standards could give comfort to the EU with regard to third-
country CCPs, there is no guarantee that such standards would be enforced in a coherent 
manner, if at all, in all major jurisdictions. This is particularly true in the context of the 
foreseen  withdrawal  of  the  UK  from  the  EU  following  which  a  very  high  volume  of 
financial instruments denominated in EU currencies as a percentage of the total will be 
cleared outside of the EU jurisdiction. 

5.2.  Options for improving the consistency of supervisory arrangements for CCPs 

established in the EU  

The  objective  of  the  policy  options  considered  under  this  heading  is  to  enhance  at  EU 
level the supervision of CCPs established in the EU and the specific role of the central 
bank of issue (CBI). More specifically, the operational objectives of these options are to: 
(i) streamline CCP supervision in the EU; and (ii) reflect more adequately the mandate of 
ESMA, CBIs and national supervisors in the supervision of CCPs established in the EU. 
The effect of these policy options should be to improve the effectiveness and efficiency 
of  current  arrangements  by  fostering  greater  cross-border  supervisory  convergence, 
aligning  supervisory  responsibility  with  related  national  fiscal  responsibility,  and 
ensuring  the  involvement  of  CBIs  in  the  authorisation  and  day-to  day  supervision  of 
CCPs. The three policy options to be assessed are summarised below: 

55 

 
 
Policy option 

Description 

1. No policy action 

The baseline scenario applies. 

2. Establishment of enhanced EU supervisory 
arrangements for CCPs established in the EU 

National supervisors would largely retain their existing 
supervisory powers. However, a European supervisory 
mechanism in an appropriate decision-making formation 
would be introduced. This formation would handle areas 
of a common interest on a more centralised basis. In a 
limited number of areas, CBIs would be able to issue a 
binding opinion on decisions taken by the executive 
session. 

3. Establishment of an EU-level supervisor for 
CCPs established in the EU 

A single EU supervisor for CCPs would be established. 
CCP supervision would no longer be conducted at national 
level.  

Option 1 - No policy action 

In the absence of any policy action, the baseline scenario applies. CCPs established in the 
EU  would  continue  to  be  mainly  authorised  and  supervised  by  their  home  supervisor 
within  a  college  of  other  authorities  responsible  for  ancillary  aspects.  ESMA  would 
retain a binding mediation role in specific cases. 

This option received the support of a number of respondents to the 2015 EMIR Review 
consultation,  which  expressed  overall  satisfaction  with 
the  current  supervisory 
arrangements  applying  to  EU-based  CCPs.  Other  respondents  (notably  including  some 
national supervisors and other public authorities126) argued that it would be premature to 
consider changes to the current supervisory arrangements. They pointed to the fact that 
most CCPs established in the EU have been (re-)authorised under EMIR only since 2014 
and so there is insufficient evidence that the supervision of these CCPs does not allow for 
a consistent application of EMIR. 

However,  this  option  would  fail  to  streamline  the  supervision  at  EU  level  of  CCPs 
established in the EU, by omitting the existing inconsistencies in the current supervisory 
arrangements  of  EMIR.  Respondents  to  the  consultation 127 ,  including  industry 
associations (CCP, markets, clearing members and buy-side associations) but also some 
national  supervisors  and  public  authorities128 highlighted  important  shortcomings  and 
malfunctions  in  the  current  framework  for  the  authorisation  and  supervision  of  CCPs 
established in the EU, for example a lack of transparency in the authorisation process and 
a  lack  of  clarity  in  the  modalities  for  the  college  process,  in  particular  the  roles  and 
responsibilities  of  different  college  members.  Many  respondents,  including  those 
satisfied  with  the  functioning  of  colleges,  emphasised  the  need  for  more  clarity  on  the 
role  of  ESMA  and  more  generally  on  the  role  of  the  college  after  a  CCP  has  been 
authorised. This option would also fail to adequately reflect  the mandate of  the CBI in 
the  supervisory  arrangements,  as  pointed  out  by  several  respondents  to  the  EMIR 
consultation,  which  saw  a  confusion  in  the  roles  of  different  authorities  within  the 
college, in particular that of the ECB as both prudential supervisor (SSM) and as a CBI. 

126 See FR, NL, UK 
127 See AMAFI, FBF, Euronext 
128 See FR-AMF, SE-Riksbank, NL-AFM 

56 

 
 
 
 
                                                 
As  a  result,  the  baseline  scenario  of  “no  policy  action”  would  leave  the  identified 
shortcomings in the current supervisory arrangements unaddressed. These shortcomings 
undermine  the  effectiveness  of  EMIR  in  delivering  the  highest-quality  supervision  for 
CCPs,  which  in  turn  are  meant  to  play  a  key  role  in  mitigating  systemic  risk. 
Complicated  procedures  and  a  lack  of  clarity  on  the  respective  roles  of  different 
authorities reduce the efficiency of the current supervisory arrangements, which implies 
an ongoing economic cost and could threaten systemic stability in episodes of stress. 

Option 2 – Establishment of an EU supervisory mechanism 

this  option,  national  supervisors  would  retain  many  of 

Under 
their  current 
responsibilities.  However,  in  order  to  enhance  the  effectiveness  and  efficiency  of 
supervisory arrangements at EU-level, an EU mechanism could be established to balance 
better the objectives of EU and national authorities in the process of supervision and to 
clarify  the  roles  of  the  various  authorities  with  supervisory  responsibility  in  respect  of 
CCPs  established  in  the  EU.  Operationally,  the  mechanism  could  for  instance  be 
established  within  ESMA  in  an  appropriate  decision-making  formation,  such  as  an 
executive session, and granted specific tasks. Such a formation could consist of a limited 
number of permanent members, as well as the national supervisor(s) and, other relevant 
national  authorities  and  CBIs  of  the  most  relevant  Union  currencies  of  the  financial 
instruments cleared. All of these authorities would be granted with adequate voting rights 
within the executive session. While the EMIR colleges would not disappear, they could 
be  headed  by  the  chair  of  the  executive  session  in  order  to  foster  supervisory 
convergence. 

Under  this  option,  national  supervisors  would  retain  primary  responsibility  for  those 
supervisory tasks which could potentially impact on national fiscal responsibilities such 
as the authorisation/withdrawal of authorisation of the CCP, the default waterfall, default 
procedures, and  recovery  plans.  However,  in  other  areas  of  common  interest,  decisions 
by national supervisors would be subject to an ex-ante process requiring consent by the 
executive  session  within  ESMA,  for  example  in  areas  relating  to  the  validation  of  risk 
models and parameters or the stress-testing framework. In practice, this could mean that 
the  national  supervisor would  present  complete  draft  decisions  to the  executive  session 
for prior consent. For a limited number of matters closely related to their specific tasks, 
and  reflecting  their  responsibility  such  as  liquidity  risk  controls  or  collateral 
requirements, the CBIs would be able to express a binding opinion. A dispute resolution 
mechanism  would  be  introduced  so  as  to  provide  national  competent  authorities  with 
tools  to  contest  the  decisions  of  the  executive  session.  In  addition  to  amendments  of 
EMIR  initiated  by  the  Commission,  this  option  might  also  require  an  amendment  of 
Article 22 of the Statute of the ESCB and of the ECB which can either be initiated by the 
ECB or the Commission. An indicative example of the allocation of tasks currently listed 
under EMIR is illustrated in the diagram below. 

57 

 
On  the  one  hand,  this  option  would  align  supervisory  and  fiscal  responsibilities  by 
leaving the supervisory powers linked to the recovery and resolution of a CCP with the 
national  supervisor,  responding  to  CCP-specific  comments  by  respondents  to  the  ESA 
consultation, including public authorities, which highlighted that an EU supervisor would 
lack financial resources to cater for a failing CCP, no matter how limited the risk of such 
an  event,  and  the  fact  that  CCPs  pose  a  systemic  risk  within  their  Member  State  of 
establishment.  However,  it  would  take  more  account  of  the  mandates  of  other  relevant 
authorities and CBIs by strengthening their input to the supervisory process (within the 
executive  session),  relative  to  their  current  input  in  supervisory  colleges.  The  option 
would  also  help  to  clarify  ESMA's  role,  which  had  been  criticised  as  being  unclear  by 
respondents to the 2015 consultation, especially with regards to the requirements laid out 
in  Article  15  (extension  of  services)  and  Article  49  (review  of  models).  By  having 
ESMA,  NCAs  and  CBIs  share  responsibilities  in  a  more  coherent  arrangement,  this 
option  would  allow  for a  more  holistic  supervision  of  the  CCP  which  more  adequately 
responds  to  the  increasingly  systemic  nature  of  these  infrastructures  within  the  EU 
financial system. In this way, it would meet the operational objective of reflecting more 
adequately the role of the CBI, ESMA and NCAs. 

While  this  option  would  introduce  a  new  EU  mechanism  to  the  current  supervisory 
arrangements in EMIR, where responsibility for CCP supervision is more concentrated in 
the  national  supervisor,  this  new  mechanism  would  help  streamline  and  balance  the 
various  roles  and  responsibilities  across  different  relevant  authorities  by  effectively 
promoting convergence in the supervision across the EU of CCPs established in the EU. 
While several authorities would remain associated with supervision, the EU mechanism 
would de facto ensure single supervision of CCPs established in the EU by promoting a 
coherent application of EMIR throughout the Internal Market. This would help make the 
current  supervisory  arrangements  in  EMIR  more  effective  and  respond  to  most  of  the 
criticism  of  the  current  supervisory  arrangements  emerging  from  the  2015  consultation 
on  the  EMIR  Review  and  the  2017  ESA  consultation,  in  which  a  vast  majority  of  the 
stakeholders representing a company highlighted the need for the further centralisation at 
EU  level  of  the  supervision  of  CCPs  established  in  the  EU,  in  order  to  improve  the 

58 

 
 
fragmentation  of  the  current  regime.  This  option  would  also  help  avoid  overlapping 
supervision and reduce inefficiencies. 

On the other hand, by setting up a new and dedicated CCP supervisory arrangement, this 
option  could  generate  costs  to  ensure  the  proper  functioning  of  the  executive  session. 
Depending on the solutions found and on any potential changes to the ESMA regulation, 
it may be necessary to fund additional resources for ESMA. Nevertheless, as ESMA is 
already a member of supervision colleges, albeit in a non-voting capacity, the additional 
needs in terms of human and financial resources would be limited. 

Option 3 – Establishment of a single EU supervisor 

Under this option, a single supervisor would be established for CCPs established in the 
EU. The single supervisor could be ESMA, the ECB, or a new entity as was the case for 
the Single Supervisory Mechanism (SSM) in the field of banking. The single supervisor 
would  be  given  full  responsibility  for  the  supervision  of  CCPs  in  the  EU,  including 
powers  to  authorise  CCPs  and  oversee  compliance  with  conduct  of  business  rules.  In 
performing these tasks, the single supervisor would be required to cooperate closely with 
the SSM (which supervises the main clearing members), the ESRB (for macro prudential 
purposes), as well as the ESAs. However, none of these authorities would have binding 
powers over the single supervisor. 

This  option  would  ensure  a  coherent  application  of  EMIR  within  the  EU  and  address 
effectively  the  need  for  supervisory  convergence.  The  arrangement  would  also 
substantially  simplify  the  supervisory  framework  in  comparison  to  the  current 
supervisory  arrangements.  This  would  meet  effectively  the  operational  objective  of 
streamlining  the  current  supervisory  arrangements  of  EMIR,  as  supervision  would 
primarily be conducted at EU level. 

However, the shortcomings of this option would be twofold. First, supervisory and fiscal 
responsibilities  would  not  be  fully  aligned,  implying  that  decisions  taken  by  the  single 
supervisor  might  not  take  adequately  into  account  the  fiscal  implications  at  national 
level,  including  potentially  the  use  of  taxpayer  money  in  resolution.  Nevertheless  as 
described in the CCP Recovery & Resolution Impact Assessment, the opportunity costs 
of  any  ex  ante  form  of  financing  would  be  significant,  in  particular  given  the  remote 
probability of default. Second, the monetary policy mandates of the relevant CBIs would 
not  be  reflected  appropriately,  although  arrangements  could  be  envisaged  to  associate 
them in the decision-making process, as the responsibility for supervision would reside 
entirely with the single supervisor. As such, Option 3 would fail to address the need to 
reflect adequately the mandates of NCAs and CBIs. 

To  a  greater  extent  than  Option  2,  Option  3  would  require  a  significant  extension  of 
supervisory capacity inside ESMA (should ESMA be retained as the single supervisor) or 
the  creation  ex  nihilo  of  a  single  supervisor  and  would  therefore  have major  budgetary 
consequences for the EU. 

59 

 
 
 
 
 
 
Comparison of policy options against effectiveness and efficiency criteria 

EFFECTIVENESS 

EFFICIENCY 

(cost-
effectiveness) 

        Objectives 

Objective 1 

Objective 2 

Policy  
option  

Streamline CCP 
supervision in the EU 

Reflect adequately 
the mandate of 
ESMA, CBIs and 
national supervisors 

Option 1 
No policy action 

Option 2 
Establishment of an EU 
supervisory mechanism 

Option 3 
Establishment of a single EU 
supervisor 

0 

+ 

++ 

0 

++ 

- 

0 

+ 

- 

Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly 
positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 

The  preferred  option  is  Option  2.  It  corresponds  to  the  objective  of  improving  the 
coherence of supervisory arrangements for CCPs established in the EU, while enabling 
that specific areas of supervisory responsibility and related national fiscal responsibility 
remain  adequately  aligned,  notably  by  ensuring  the  proper  involvement  of  CBIs  and 
NCAs  within  the  scope  of  their  responsibilities.  By  streamlining  and  increasing  the 
centralisation  of  CCP  supervision,  the  preferred  option  will  provide  CCPs  and  market 
participants with more clarity and predictability as well as greater legal certainty in the 
way  CCPs  are  supervised  within  the  EU.  The  preferred  option  will  also  contribute  to 
lower  costs  both  at  an  institutional  level,  by  avoiding  supervisory  overlaps  between 
authorities, and for CCPs, by simplifying their supervisory framework simplified and by 
limiting the risk of duplication. 

5.3.  Mitigation of third-country CCP risks 

The objective of the policy options considered under this heading is to enhance the EMIR 
supervisory arrangements in order to strengthen the EU's ability to identify, monitor and 
mitigate  the  risks  related  to  third-country  CCPs.  More  specifically,  the  operational 
objectives of these options are to: (i) enhance mechanisms for EU supervisors and CBIs 
to  address  third-country  CCP  risks;  (ii)  ensure  a  level-playing  field  between  EU-based 
and third-country CCPs; and (iii) provide for better ongoing enforcement and compliance 
of  third-country  CCPs.  The  effect  of  these  policy  options  should  be  to  provide  EU 
supervisors with more effective tools and procedures for managing such risks. The three 
policy options to be assessed are summarised below: 

60 

 
 
 
 
 
 
 
 
Policy option 

Description 

1. No policy action 

2. Location policy 

3. Supervision based on criteria or thresholds 

The baseline scenario applies. 

Third-country CCPs would be required to be established 
and authorised in the EU in order to provide services to 
EU counterparties or trading venues or to provide clearing 
services in EU currencies. 

The degree and intensity of EU supervision would be 
proportionate and depend on the risks posed by third-
country CCPs to the EU. Different criteria or thresholds 
could be set: low-impact CCPs could be subject to an 
enhanced implementation of the EMIR equivalence and 
recognition regime; medium to high-impact CCPs could 
be subject to a sliding scale of additional supervisory 
requirements. 

Option 1 - No policy action 

In the absence of any policy action, the baseline scenario applies. 

The  baseline  scenario  consists  in  leaving  the  equivalence  and  recognition  regime 
envisaged  in  EMIR  Article  25  unchanged.  Under  this  scenario,  third-country  CCPs 
wishing  to  provide  clearing  services  in  the  Union  would  be  recognised  by  ESMA 
following the adoption of an equivalence determination by the Commission. 

The main advantage of this option is that a large number (28) of third-country CCPs have 
already  been  recognised  and  that  their  status  would  not  have  to  be  reassessed, 
notwithstanding the fact that all of the equivalence decisions adopted by the Commission 
require  a  regular  assessment  in  any  event.  However,  this  option  would  not  address 
several  important  concerns  with  the  current  arrangements,  e.g.  proportionality, 
involvement  of  the  CBIs  and  unlevel  playing  field.  As  highlighted  in  the  2015  EMIR 
consultation 129 ,  the  regulatory  framework  of  a  third-country  CCP  may  be  deemed 
equivalent to EMIR but the intensity of supervision may be less for third-country CCPs 
than for CCPs established in the EU. This option would also not address the lack of tools 
available to ESMA in monitoring and managing equivalence on an ongoing basis. 

The baseline scenario would also fail to address the consequences of the decision of the 
UK to leave the EU. CCPs located in the UK will become third-country CCPs once the 
UK effectively leaves the EU. Some of these CCPs have significant outstanding positions 
denominated  in  currencies  of  the  Member  States  and  large  exposures  with  clearing 
members  established  inside  the  EU.  While  this  impact  assessment  does  not  intend  to 
cover  the  contingency  considerations  related  to  the  interim  period  between  the 
withdrawal  of  the  UK  from  the  EU  and  the  moment  that  any  equivalence  decision  is 
taken by the omission with regard to the UK's future supervisory framework for CCPs, it 
does take into consideration the potential future exposure of the EU financial system to 
an abrupt change in the third-country environment. 

129   See NL-DNB, NL-AFM, BlackRock, Natixis, EFAMA, 

61 

 
 
 
 
                                                 
Option 2 – Location policy 

Under  this  option,  EMIR  would  be  modified  so  that  third-country  CCPs  would  be 
required to be established and authorised in the EU in order for them to provide services 
to EU counterparties or trading venues or to provide clearing services in EU currencies. 

In conjunction with the preferred policy option for enhancing supervisory arrangements 
for  CCPs  established  in  the  EU,  this  option  would  allow  for  full  supervision  of  third-
country  CCPs  and  adequate  mitigation  of  any  associated  systemic  risk,  including  in 
particular  the  risk  that  a  disruption  to  the  functioning  of  a  highly  concentrated  global 
third-country  CCP  occurs.  The  UK  being  one  of  the  jurisdictions  of  establishment  of 
such CCPs, this risk will be increased once the UK leaves the EU. 

This  option  could  however  potentially  lead  to  market  fragmentation,  depending  on  its 
precise  articulation,  raising  additional  costs  for  market  participants  due  to  losses  in 
netting efficiencies. That said the potential costs to the financial system would have to be 
weighed  against  the  gains  in  systemic  risk  mitigation,  although  the  exact  monetary 
benefits of a reduction of systemic risk are difficult to quantify in advance. Experience 
shows that these costs can only be accurately calculated after a financial crisis in terms of 
economic and social losses. 

Market fragmentation might occur should EU counterparties be mandated or incentivised 
through  prudential  rules  to  clear  specific  transactions  through  EU  CCPs.  Two  markets 
could coexist without interconnecting bridges, a less liquid and perhaps potentially more 
expensive  market  would  cater  for  the  limited  needs  of  EU  counterparties  and  a  more 
liquid market would continue to exist outside of the EU. While figures are not public and 
differ widely depending on the source, it is estimated that between 7 and 30% of interest 
rates  derivatives  currently  cleared  in  the  United  Kingdom  involve  an  EU  counterparty. 
However the study conducted by ISDA130, already presented in section 2.3, finds that the 
percentage  of  euro  denominated  interest  rate  swaps  (IRS)  traded  exclusively  between 
European dealers and cleared at LCH at the end of 2015 stood at 91.2%. In April 2016, 
the interdealer market accounted for 26% of the global turnover in OTC IRDs131. Thus, 
European  dealers  alone  represent  about  24%  of  the  global  activity  in  the  euro 
denominated IRS market. 

While it is of course not possible to quantify in a meaningful manner the costs related to 
relocation  and  potential  market  fragmentation,  it  is  possible  to  list  the  drivers  that  will 
influence  these  costs.  These  drivers  can  be  divided  into  five  (overlapping)  categories, 
some of them being more significant than others: 

1. 
Transaction  costs.  Should  all  existing  outstanding  cleared  transactions  be 
required to be moved to CCPs inside the EU, EU counterparties could choose to enter so-
called  'switch  trades'  in  which  they  would  unwind  transactions  cleared  through  third-
country CCPs and reopen and clear them in EU CCPs. This would generate friction costs 
as  third-country  counterparties  would  have  no  interest  in  doing  those  switch  trades  for 
free.  There  is  no  guarantee  that  all  existing  transactions  could  be  transferred  this  way, 
even at a higher cost for EU counterparties. 

130   http://www2.isda.org/attachment/ODM4NQ==/Fragmentation%20FINAL1.pdf  
131   See http://www.bis.org/publ/rpfx16ir.pdf  

62 

 
                                                 
2. 
Legal  costs.  Another  possibility  for  existing  cleared  transactions  would  be  to 
close and novate132 these transactions from one CCP to another. If the move is initiated 
by CCPs themselves (in the case of a third-country CCP having an affiliate inside the EU 
or being part of a group owning a CCP located inside the Union or through arrangements 
between  CCPs)  then  the  costs  of  repapering  could  be  limited,  albeit  not  zero,  as  the 
novation  would  be  done  in  a  bulk  format.  If  initiated  by  EU  counterparties  this  would 
require extensive legal work as EU counterparties would have to renegotiate and repaper 
all existing trades with their initial counterparties. 

Loss  in  margin  efficiencies.  While  margin  efficiencies  are  one  of  the  most 
3. 
significant drivers, the potential loss in margin efficiencies is difficult to assess and is the 
object  of  controversial  and  often  opposing  views  between  stakeholders.  CCPs  may 
reduce margin requirements to reflect the benefits of the correlation of risk factors within 
clearing  portfolios.  This  applies  in  particular  to  CCPs  clearing  interest  rate  derivatives 
(IRDs)  which  can  gain  efficiencies  in  margin  requirements  by  offsetting  risks  arising 
from transactions in a given currency (e.g. EUR) with risks arising from transactions in 
other currencies (e.g. USD or JPY). 

If EU counterparties would need to restructure their clearing portfolios both within and 
outside  the  EU,  they  could  incur  costs.  This  is  because  the  EU  currency-denominated 
part  of  EU  counterparties'  portfolios  would  no  longer  benefit  from  offsets  with  other 
currencies if they are not able to be relocated in a similar multi-currency CCP inside the 
EU.  Similarly,  trades  in  non-EU  currency-denominated  transactions  cleared  by  EU 
counterparties outside of the EU would no longer benefit from offsets with EU currency-
denominated transactions. Non-EU counterparties would also incur costs as they would 
clear  fewer  EU  currency-denominated  transactions  (with  EU  counterparties)  and 
therefore  have  fewer  benefits  from  currency  offsets.  This  would  also  have  potential 
indirect effects on costs linked to portfolio compression and default fund contributions. 

A  key  question  is  to  what  extent  an  EU-based  CCP  receiving  any  new  EU  currency- 
denominated  trades  would  have  capacity  to  offer  a  similar  degree  of  cross-portfolio 
margining  benefits  to  offset  these  costs.  Anecdotal  evidence  from  industry  provides 
different perspectives, as some CCPs indicate a capacity to accommodate clearing such 
trades against similar costs, while others have noted that it depends on the type of trades 
and  period  of  time  required  to  build  that  capacity.  The  following  seeks  to  quantify  the 
associated  costs,  making  the  important  proviso  that  there  are  data  limitations:  the 
necessary data is proprietary to CCPs while data for third-country CCPs is not available 
to EU authorities and institutions. The distribution of costs between market participants 
cannot  be  accurately  assessed  and  all  estimated  costs  may  be  assumed  to  be  passed-on 
from large dealers to their direct and indirect clients, such as non-financial counterparties 
(including SMEs). Finally, there are two perspectives: on the one hand, considering the 
'stock' of outstanding positions that are currently cleared at CCPs with maturities ranging 
from overnight to up to 51 years; on the other hand, the 'flow' of new  transactions that 
market participants must or may wish to clear in the future. 

(a)  On  the  basis  of  confidential  and  proprietary  data  available  to  the  Commission,  the 
estimate (weighted average) of an increase in initial margin following a divide or 'split' of 
existing  cleared  IRDs  would  be  in  the  range  of  8%  to  12  %,  depending  on  the  related 
margin  and  netting  efficiencies  after  a  divide  or  'split',  including  cross-margining 

132   In contract law and business law, novation is the act of either: replacing an obligation to perform with 
another obligation; or adding an obligation to perform; or replacing a party to an agreement with a new 
party. 

63 

 
                                                 
opportunities between exchange-traded and OTC IRD portfolios. The 8% figure reflects 
a scenario where market participants would transfer their stock of EUR denominated IRD 
portfolios to a CCP that is already established in the EU and where a degree of netting 
benefits could already occur (i.e. the transfer would not take place to a new CCP or to a 
CCP with no existing positions). The 12% figure assumes no such efficiencies and only 
accounts  for  the  loss  of  cross-currency  margining  efficiencies  within  the  OTC  IRD 
portfolio.  This  increase  in  initial  margin  represents  the  difference  between  the  total 
amount of initial margin before the stock of EUR denominated portfolios is transferred to 
another CCP, to the total amount of initial margin after that transfer, accounting for the 
net  change  in  cross-currency  portfolio  margin  efficiencies  across  the  OTC  IRD 
portfolios.  The  exact  impact  on  individual  market  participants  of  course  varies, 
depending on their portfolio composition. 

(b)  Other  estimates  have  also  been  made.  For  example,  one  study133 suggests  that  the 
impact of transferring the stock of EUR-denominated IRDs would incur a cost of $77bn 
(a 92% increase) in additional initial margin requirements. However, this study implies 
that  the  CCP  concerned  currently  applies  a  50%  margin  discount,  which  appears 
questionable  under  the  current  regulatory  framework.  Furthermore,  the  extreme 
hypotheses and scenarios of the study mean that the costs calculated need to be read in 
context (e.g. it assumes that the entire portfolio of the CCP examined would be reduced 
to  only  one  interest  rate  swap  while  in  reality  the  actual  portfolio  of  the  CCP  extends 
across  multiples  of  clearing  members  and  client  accounts.  Furthermore,  the  study 
analyses an interest rate swap portfolio reduction for a single long EUR/Short USD 12y 
swap,  assuming  that  the  market  as  a  whole  conducts  a  directional  correlation  trade 
between both currencies: this is not the practice where clients and dealers have genuine 
specific interests and ignores other cross-currency and cross-products offsets.) 

Comparing  both  scenarios  (a)  and  (b),  the  additional  initial  margin  under  scenario  (a) 
would  therefore  amount  to  a  range  between  EUR  6.8  billion  to  EUR  10  billion 
(corresponding  to  the  8%  and  12%  figure  scenarios  quoted  above,  respectively).  This 
initial margin increase would also be associated with a higher contribution to the default 
fund.  Based  on  current  practice,  this  would  imply  an  increase  in  the  default  fund 
contribution in the range of EUR 478 million to EUR 705 million. 

Importantly, the required amount of additional margin and default fund contribution does 
not represent the actual  cost for  market participants as  margin is posted in the form  of 
collateral,  a  resource  that  is  accessible  and  must  be  funded.  The  real  cost  for  market 
participants is therefore the  actual cost of funding this additional collateral requirement 
and the increased default fund contribution. For the purposes of this impact assessment, 
taking  into  account  current  money  market  rates  and  different  credit  profiles  of  market 
participants,  a  funding  cost  of  0.50%  p.a.  can  be  reasonably  applied  to  estimate  the 
overall financial impact from the increased initial margin requirement. This leads to an 
additional cost in the range of EUR 34 million to EUR 50 million p.a. Assuming that the 
default fund contribution is financed by capital at 10% cost, the additional cost to fund 
this contribution would fall in the range of EUR 48 million to EUR 71 million p.a. Thus, 
scenario (a) to transfer a portfolio of Euro denominated IRDs from one CCP to another 
would  result  in  additional  aggregate  cost  in  the  range  of  EUR  82  million  to  EUR  121 
million p.a. 

It is also possible that a transfer of a portfolio of Euro denominated IRDs from one CCP 
to  another  may  increase  efficiency  and  result  in  a  reduction  of  costs.  The  scenarios 

133   https://www.clarusft.com/moving-euro-clearing-out-of-the-uk-the-77bn-problem/  

64 

 
                                                 
discussed  above  limit  themselves  to  the  transfer  of  Euro-denominated  OTC  IRD 
portfolios. A  possible, but  remote  scenario may  also be studied according to which the 
entire  OTC  IRD  portfolio  is  transferred  from  one  CCP  to  another.  This  would  assume 
that  that  there  is  a  reason  to  maintain  a  maximum  benefit  of  existing  cross-currency 
portfolio  margin  efficiencies.  According  to  such  a  scenario,  the  costs  would  even  be 
lower than under scenario (a). According to Commission analysis, the weighted average 
change in the required initial margin in this scenario would constitute a reduction of up to 
3%. This scenario therefore implies an aggregate annual gain from lower initial margin 
requirements  and  reduced  default  fund  contribution  in  the  range  of  EUR  5  million  to 
EUR 34 million. Indeed, it is not sure whether a move of euro clearing to the continent 
will  automatically  lead  to  higher  clearing  costs  in  the  long  run.  A  concentration  of  the 
clearing business can also happen in Europe – and lead to possible netting advantages for 
counterparties134. 

These costs or benefits would likely fall on the relevant counterparties. Only a minority 
of  the  volume  of  derivatives  is  concluded  by  non-financial  counterparties135,  while  the 
large  majority  of  these  counterparties  are  financial  institutions.  Incidentally,  some  of 
these costs/benefits may be passed on to their end customers. 

As a final comment, the scenarios above only consider the stock of existing transactions. 
A  policy  approach  that  would  only  cover  the  flow  of  new  transactions  would  generate 
only limited temporary losses of cross-margining opportunities in a CCPs receiving those 
transactions and would not affect in the short term the cross-margining benefits in third-
country CCPs in which the stock is cleared. 

4. 
Operational  costs.  This  would  represent  the  costs  and  capital-related  prudential 
costs related to the additional risk incurred to repaper, renegotiate, re-execute or re-book 
existing transactions. 

5. 
Liquidity costs. Liquidity costs are the costs linked to the market fragmentation. 
As  explained  above,  two  markets  could  coexist  without  bridges  between  them,  a  less 
liquid and therefore potentially more expensive market would cater for the limited needs 
of EU counterparties and a more liquid market would continue to exist outside of the EU, 
resulting  in  a  level-playing  field  issue  between  EU  and  non-EU  counterparties.  These 
costs  could  be  avoided  if  clearing  of  a  large  part  of  a  market  segment,  for  example  all 
Euro-denominated  transactions  of  a  certain  type,  would  for  economic  or  other  reasons 
concentrate at a single CCP within the EU. 

However,  it  should  be  noted  that  market  fragmentation  is  already  present  in  the  global 
OTC  IRD  markets,  resulting  in  different  pricing  of  two  identical  IRS  contracts, 
depending on where they are cleared. Using appropriate assumptions would yield a broad 
estimate of several hundred million Euros in annual costs which can be divided between 
financial institutions (accounting for the majority of costs) and non-financial customers. 

134   Sustainable Architecture for Finance in Europe (SAFE) policy blog, available at: 

http://safe-frankfurt.de/policy-blog/details/euro-clearing-in-london-is-unacceptable.html.  For  further 
information,  see  SAFE  Policy  papers,  ''Predatory'  Margins  and  the  Regulation  and  Supervision  of  
Central Counterparty Clearing Houses', Jan Pieter Krahnen and Loriana Pelizzon, September 2016:  
http://safe-
frankfurt.de/fileadmin/user_upload/editor_common/Policy_Center/Krahnen_Pelizzon_CCP.pdf  
135   According to ESMA's report on Non-financial counterparties, NFCs only represent 2% of the overall 

amount of reported derivatives transactions. (See Table 2, page 8 of the ESMA report) 
https://www.esma.europa.eu/sites/default/files/library/2015/11/esma-2015-1251_-
_emir_review_report_no.1_on_non_financial_firms.pdf  

65 

 
                                                 
  
It  should  be  noted,  however,  that  this  estimate  represents  the  maximum  theoretical 
impact, which is very unlikely to materialise in full and is also likely to be temporary due 
to the nature of the adjustment process. 

To conclude, even these theoretical costs would be significantly reduced if the clearing 
obligation were to be introduced only for the flow of new transactions rather than also for 
the stock of already cleared ‘legacy’ transactions. 

In implementing this option, the following approaches merit consideration: 

1. 
 Requiring  clearing  members  established  in  the  EU  to  fulfil  their  clearing 
obligation under EMIR Article 4 only with CCPs established and authorised in the EU. 
This  could  either  be  restricted  to  OTC  derivatives  for  which  a  clearing  obligation  has 
been  introduced  and  which  are  denominated  in  an  EU  currency  or  be  extended  to  all 
OTC  derivatives  for  which  a  clearing  obligation  has  been  introduced  (including  OTC 
derivatives  denominated  in  non-EU  currencies).  The  scope  of  the  clearing  obligation 
could eventually be modified and enlarged so that it includes other financial instruments 
such as Securities Financing Transactions (SFTs). 

2. 
Introducing the concept of 'EU person' in EMIR (cf. the approach adopted in the 
USA) and require that an 'EU person' can only clear OTC derivatives or more broadly 
financial instruments denominated in EU currencies in CCPs established and authorised 
in the Union. This requirement could be restricted to certain classes of OTC derivatives 
or financial instruments either in Level 1 or through delegated acts. An 'EU person' could 
consist  of  (but  not  be  limited  to)  any  financial  counterparty  and  its  affiliates,  non-
financial  counterparty  and  its  affiliates,  pension  scheme  arrangement,  institutions  for 
occupational  retirement  provision  and  any  other  authorised  and  supervised  entities  or 
arrangements  providing  retirement  benefits,  in  each  case  that  is  established  in  the  EU. 
This  option  could  be  broader  in  scope  compared  to  Option  1  as  under  Option  1  the 
obligation  to  clear  transactions  through  EU  CCPs  would  only  be  introduced  via  the 
clearing obligation. 

3.  
Requiring all transactions of a certain market segment in an EU currency to be 
cleared within the EU. This option would be even broader in scope compared to Options 
1 and 2. It would however depend on the possibility to impose such requirements also on 
non-EU counterparties. 

The first approach is the simplest to implement but would only affect transactions subject 
to the clearing obligation between two counterparties (or clients) at least one of which is 
established  in  the  EU.  All  transactions  between  two  non-EU  counterparties  (or  clients) 
would  be  out  of  the  scope  and  EU-denominated  transactions  would  continue  to  be 
cleared  within  third-country  CCPs,  unless  those  transactions  were  to  be  included.  For 
some classes of financial instruments (Interest Rate Derivatives for example) this could 
lead  to  a  market  fragmentation  detrimental  to  EU  counterparties  as  the  bulk  of  the 
transactions are traded between non-EU counterparties.  For other financial transactions 
such  as  SFTs,  the  fragmentation  would  most  likely  end  up  being  beneficial  to  EU 
counterparties as this market is more locally anchored and cross-currency netting effects 
within  CCPs  are  less  evident.  It  could  also  lead  to  a  competitive  disadvantage  for  EU 
counterparties regarding non-EU counterparties. 

Approach 2 has the same inconvenience of only targeting EU counterparties but is wider 
in  scope,  thus  potentially  more  effective  in  reaching  the  risk  mitigation  objective.  This 
possibility  would  most  likely  see  the  establishment  of  a  transition  regime  where  'EU 

66 

 
person'  would  face  costs  due  to  market  fragmentation  and  loss  in  netting  efficiencies 
before the clearing market re-equilibrates. 

Approach 3 is the most effective with regard to the objective of financial stability in the 
EU  and  price  stability  of  EU  currencies,  a  responsibility  of  the  ESCB.  It  introduces  a 
high degree of extraterritoriality and could be detrimental to the usage of EU currencies, 
and in particular the Euro, as an international settlement currency. 

This  option  would  fulfil  all  operational  objectives  but  could  present  high  and 
unpredictable  costs  for  EU  counterparties  while  not  being  proportionate  in  its 
implementation.  In  particular  a  generalised  location  policy  would  be  excessively 
fragmenting  and  disrupting  for  financial  markets,  thereby  potentially  generating 
substantial costs as described above. 

Option 3 – Supervision based on criteria or thresholds 

Under this option, the nature and extent of supervision by EU authorities would depend 
on the risks posed by third-country CCPs to the EU system. In order to be proportionate, 
different  criteria  or  thresholds  would  need  to  be  set,  taking  into  account  the  different 
nature and risks of products cleared by the CCPs. Criteria or thresholds could be either 
communicated publicly or could be 'internal', non-public indicators developed by and for 
authorities to signify that certain supervisory actions need to be taken. The role of ESMA 
would  be  enhanced,  in  an  appropriate  decision-making  formation  involving  relevant 
CBIs,  in  a  way  consistent  with  the  preferred  option  for  the  supervision  of  EU-based 
CCPs. The framework could be articulated as follows: 

 

‘Tier  1’  CCPs.  For  low-impact  (i.e.  posing  limited  exposure  risk  for  the  EU)  third-
country  CCPs  (Tier  1):  the  implementation  of  the  equivalence  and  recognition 
regime would be clarified and enhanced, in order to provide an improved toolbox for 
EU authorities with respect to third-country CCPs 

  Targeted  changes  would  be  introduced  to  reinforce  ESMA's  position  in  its 
relationship with third-country CCPs and their home supervisors including: (i) 
improved  access  for  ESMA  to  information  directly  (or  indirectly  via  home 
supervisors)  in  third-country  CCPs;  (ii)  powers  to  enable  ESMA  to  legally 
and confidentially share the information it obtains on third-country CCPs with 
all relevant EU authorities (i.e. central banks, national competent authorities) 
as  appropriate;  and  (iii)  the  ability  to  conduct  regular  on-site  inspections  of 
third-country CCPs. 

  No  further  supervisory  requirements  or  involvement  of  EU  central  banks  of 

issue would be introduced. 

 

‘Tier  2’  CCPs.  For  medium-impact  and  high-impact  third-country  CCPs  (Tier  2),  a 
registration  and  gradual  risk-based  supervision  regime  would  apply  with  additional 
supervisory requirement or involvement of EU CBIs: 

  Tier  2  CCPs  willing  to  service  clearing  members  or  trading  venues 
established in the EU would be authorised by, and registered with, ESMA and 
relevant CBIs, following an authorisation process comparable to that of CCPs 
established  in  the  EU.  The  registration  with  the  CBIs  would  enable  them  to 
carry  out  their  mandates  and  fulfil  their  responsibilities  as  described  under 
section  3.2.  In  order  to  register  with  the  relevant  CBIs,  the  CCP  would 
provide  the  same  documentation  as  required  for  full  authorisation  under 
EMIR. Supervision of the third-country CCP would be conducted by ESMA, 

67 

 
with  full  and  appropriate  consultation  of  the  relevant  CBIs.  As  under  the 
CFTC  supervisory  framework,  a  scalable  and  proportionate  system  of 
'deference' and 'substituted compliance' to third-country rules that are similar 
to  EU  requirements  would  be  introduced  so  as  to  avoid  duplication  and 
potential conflicts between requirements; 

  ESMA and the relevant CBIs would  have full access to information and the 
same  powers  as  for  a  CCP  established  in  the  Union.  The  supervision  by 
ESMA and the relevant CBIs would grow in intensity with the risk posed to 
the EU by the activity of the CCP; 

  Tier  2  CCPs  could  be  subject  to  additional  supervisory  requirements  by  EU 
authorities  in  close  cooperation  with  third-country  home  authorities  in  order 
to minimise operational burdens; 

  The intensity of requirements could possibly include a requirement for Tier 2 
CCPs to be established and fully re-authorised in the EU. This would be a last 
resort requirement where the risks of the third-country CCP to the stability of 
the  EU  financial  system  could  not  be  appropriately  mitigated  through 
additional supervisory requirements. This could imply requiring a high-impact 
third-country  CCP  to  establish  a  branch  or  a  subsidiary  in  the  EU  or  to 
transfer  part  or  all  of  the  business to  an  existing  CCP  already  established  in 
the EU. 

This option has the advantage of being scalable and proportionate in its effects. A third-
country  CCP  would  be  subject  to  a  ‘sliding  scale’  of  additional  and  appropriate 
supervisory  requirements  by  ESMA  and  relevant  CBIs.  The  intensity  of  the  EU 
supervision  could  range  from  an  “equivalence  plus  registration”  requirement  for  a  first 
tier of non-systemically important third-country CCPs to a “full supervision” requirement 
for a second tier of systemically important third-country CCPs, depending on a variety of 
factors including the degree of risk exposure. At the same time, the relevant CBIs would 
be able to exercise their prerogatives136. 

Operationally, ESMA and the relevant CBIs could assess the systemic relevance of third-
country  CCPs  on  the  basis  of  a  range  of  pre-established  criteria  or  thresholds.  These 
could  take  into  account  for  example  elements  such  as  the  size  and  complexity  of  the 
third-country  CCP's  business,  the  third-country  CCP's  interdependencies  with  other 
financial  market  infrastructures  or  the  aggregated  amount  of  financial  instruments 
denominated in EU currencies cleared. 

This  option  would  imply  an  important  change  in  current  supervisory  arrangements  for 
third-country CCPs and would need to be carefully explained to stakeholders including 
the EU’s international partners. However, the broad approach outlined above has major 
similarities  with  that  applied  in  other  jurisdictions,  and  in  particular  the  US.  CCPs  are 
acquainted with and accustomed to operating under such arrangements. 

136   This approach is currently broadly followed in the US under the Dodd-Frank Act which requires all 
EU CCPs that engage in business with US counterparties to register with the CFTC and be subjected 
to full US supervision, including access to data and on-site inspections, subject to the possibility for 
the  CFTC  to  waive  compliance  with  certain  requirements  based  on  “substitute  compliance”  in  the 
home jurisdiction. This effectively requires a CCP to be subject to two sets of regulatory requirements 
at  the  same  time  –  US  and  EU  –  and  sometimes  raises  instances  of  incompatibility  and  conflict  of 
rules. 

68 

 
                                                 
If thresholds to distinguish between tiers were to be introduced publicly, they should rely 
on clear and objective criteria and could either be set directly by the relevant CBIs or by 
the  Commission  after  having  consulted  the  relevant  CBIs,  This  would  communicate 
clearly to market participants at which point supervisory action and intervention may be 
expected.  The  possible  downside  of  such  thresholds  is  that  financial  market  responses 
may  be  designed  to  circumvent  those  thresholds  by  re-arranging  business  activities.  A 
further issue that requires consideration is the potential fragmentation of global business 
into  currency  zones  if  supervisory  arrangements  become  too  onerous,  which  could 
increase inefficiencies and costs. 

If  such  criteria  or  thresholds  are  to  apply  for  internal  purposes  for  authorities,  i.e.  as 
indicators  for  the  need  to  take  measures  or  to  intensify  the  scrutiny  of  CCPs,  such 
thresholds could be determined through internal decisions of the authorities, still relying 
on public clear and objective criteria. This approach would avoid the issues noted in the 
previous paragraph and would permit a system based on discretion of the authorities to 
respond  the  specific  needs  and  risks  on  case  by  case  basis.  This  could  ensure  greater 
degree of proportionality in the practical application of supervisory decisions. Under both 
options  for  thresholds  (publicly  communicated  or  internal),  the  ultimate  decision  to 
change the supervisory regime or its intensity would be left to the discretion of the public 
authorities concerned: ESMA and the relevant CBIs. 

Furthermore,  regular  monitoring  and  review  of  third-country  CCPs  business  operations 
would  be  required.  Importantly,  there  would  need  to  be  regulatory  consequences  for 
threshold breaches (e.g. exposures to those CCPs would no longer be considered to be in 
compliance  with  the  clearing  obligation  in  EMIR  and  would  cease  to  benefit  from  the 
beneficial  capital  requirements  provided  for  in  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). 
Additionally,  the  possibility  to  apply  sanctions  to  EU  clearing  members  conducting 
business with such CCPs might also be considered. 

This option addresses the concerns of stakeholders with regard to potential situations of 
un-level  playing  field  detrimental  to  CCPs  established  in  the  EU  in  the  way  that 
supervision is enforced, as pointed by ESMA in its contribution to the EMIR review. In 
addition  this  option  would  also  accommodate  concerns  related  to  the  alignment  of 
supervisory  and  economic  responsibilities 137 .  Finally,  it  addresses  systemic  risks 
concerns  by  being  scalable  and  introducing  the  possibility  to  apply  additional 
requirements to high-impact CPs. In particular this option addresses upcoming concerns 
relative to the withdrawal of the UK from the EU. 

This  option  would  have  a  limited  impact  on  existing  equivalence  and  recognition 
determinations  as  any  potential  changes  would  be  restricted  to  third-country  CCPs  of 
systemic  relevance  to  the  EU.  Furthermore  this  option  does  not  impede  on  the 
Commission's ability to take equivalence decisions. 

Comparison of policy options against effectiveness and efficiency criteria 

137   See also Jan-Pieter Krahnen, Sustainable Architecture for Finance in Europe (SAFE), available at: 

http://safe-frankfurt.de/policy-blog/details/euro-clearing-in-london-is-unacceptable.html.  For  further 
information,  see  SAFE  Policy  papers,  ''Predatory'  Margins  and  the  Regulation  and  Supervision  of  
Central Counterparty Clearing Houses', Jan Pieter Krahnen and Loriana Pelizzon, September 2016:  
http://safe-
frankfurt.de/fileadmin/user_upload/editor_common/Policy_Center/Krahnen_Pelizzon_CCP.pdf 

69 

 
                                                 
  
EFFECTIVENESS 

Objective 1 
Enhance 
mechanisms for 
EU supervisors 
and CBIs to 
address third-
country CCP risks 

Objective 2 
Ensure a level-
playing field between 
CCPs established in 
the EU and third-
country CCPs 

0 

++ 

++ 

0 

++ 

++ 

Objective 3 
Provide for 
better 
ongoing 
enforcement 
and 
compliance 
of third-
country CCPs 

0 

++ 

++ 

EFFICIENCY 

(cost-
effectiveness) 

0 

- 

+ 

        Objectives 

Policy  
option  

Option 1 
No policy change 

Option 2 
Location policy 

Option 3 
Supervision based on 
criteria or thresholds 

Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly 
positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 

The  preferred  option  is  Option  3.  The  preferred  option  corresponds  to  the  operational 
objectives of enhancing the mechanisms for EU supervisors and CBIs to address third-
country CCP risks while ensuring a level-playing field between CCPs established in the 
EU  and  third-country  CCPs  and  providing  for  better  ongoing  enforcement  and 
compliance  of  third-country  CCPs.  While  Option  3  relies  on  an  inevitable  trade-off 
between  supervisory  burden  and  financial  stability,  the  marginal  cost  would  stay 
proportionate  to  the  risk  posed  by  the  CCP  to  the  financial  stability  of  the  EU.  In 
addition, Option 3, by making a location in the EU a last resort requirement only for the 
most systemic CCPs would reduce costs to a minimum. 

6.  OVERALL IMPACT OF THE PACKAGE 

The  package  of  proposed  options  aims  to  establish  clear  and  coherent  supervisory 
arrangements for CCPs established in the EU and in third countries. 

to 

size, 

(responding 

their  growing 

The preferred options will strengthen supervisory arrangements for CCPs established in 
the  EU 
integration,  concentration  and 
interconnectedness) and enable EU authorities to better monitor and mitigate risk related 
to the EU's exposure to third-country CCPs. The two preferred options are coherent, as 
the option retained for the supervision of EU-based CCPs, where ESMA and the relevant 
CBI  would  be  granted  extended  supervisory  powers  through  the  'Executive  Session', 
works hand-in-hand with the option retained for the supervision of third-country CCPs, 
where  ESMA  and  the  relevant  CBI  can  apply,  also  through  the  'Executive  Session', 
additional supervisory requirements proportional to the risks posed by the third-country 
CCP  to  the  EU.  This  will  help  to  lower  even  further  the  already  low  probability  (but 
extremely high-impact) risk of a CCP failure and reinforce the overall stability of the EU 
financial  system  as  a  whole.  The  enhanced  supervisory  framework  will  improve  legal 
and  economic  certainty  as  a  whole.  While  there  may  be  upfront  economic  costs 
associated with the framework,  the  2007-8 financial crisis provides extensive empirical 
evidence of the benefit of crisis prevention via the most effective possible arrangements 
for supervision. 

70 

 
 
 
 
 
 
 
 
 
 
 
Estimating  costs  related  to  the  preferred  options  presents  limitations  as  both  problems 
deal  with  the  supervision  of  CCPs.  While  the  additional  costs  or  the  restructuration  of 
costs  for  EU  and  national  authorities  (e.g.  additional  resources  and  tasks)  can  be 
quantified, the impact for market participants is less straightforward and would be based 
on  hypotheses  rending  them  questionable.  Furthermore,  since  the  preferred  option  for 
third-country  CCPs  is  based  on  a  sliding  scale  of  supervisory  requirements,  the  costs 
related would be CCP-specific and depend on the impact on the EU of the activities of 
the  CCPs  supervised  or  recognised.  However  it  is  possible  to  identify  the  source  of 
potential costs or efficiencies for market participants. 

Potential for regulatory simplification and cost reduction 

The aim of this initiative is to streamline the supervision framework for CCPs established 
in the EU and to strengthen the supervision of third-country CCPs. By centralising at EU 
level  the  supervisory  work  inside  the  'Executive  Session',  this  initiative  removes  the 
duplication of tasks between national authorities. This should create economies of scale 
at EU level and diminish the need for dedicated resources at national level. 

As  far  as  market  participants  are  concerned,  CCPs  should  mainly  benefit  from  a 
reduction  in  the  administrative  burden  with  a  single  point  of  entry  for  cross-border 
supervision at EU level. 

Impact on market participants (including SMEs) 

Concerning the  supervision  of  CCPs  established  in  the  EU,  under  the  preferred  option, 
the  changes  proposed  are  not  expected  to  have  a  significant  impact  on  the  cost  of 
clearing, whether it is for clearing members or their clients and indirect clients. In order 
to fund the European mechanism, CCPs may be required to pay supervisory fees. These 
would however be  proportionate to their  activity and would only represent a  negligible 
fraction of their turnover. While these costs may be passed on to the market these would 
represent minimal adjustment costs. 

Concerning the supervision of third-country CCPs, under the preferred option, the costs 
would mostly materialise in case the location policy tool is triggered as part of the sliding 
scale  of  supervisory  requirements.  With  the  exception  of  the  location  requirement,  for 
Tier 1 CCPs and Tier 2 CCPs, the situation would be close to that of CCPs established in 
the  EU,  with  limited  supervisory  fees  to  fund  the  European  mechanism.  This  would 
trigger only limited additional costs to market participants. 

A  core  number  of  staff  will  be  required  in  order  to  set  up  and  operationalise  the 
Executive Session to conduct the daily business of supervision of the 17 CCPs currently 
established  in  the  EU.  Assuming  all  third  country  CCPs  requesting  recognition  are 
recognised  eventually,  that  would  mean  around  40  third-country  CCPs  under  the 
Executive  Session's  competence  – either indirectly through  monitoring and information 
exchange  (i.e.  Tier  1  CCPs)  or  through  more  direct  supervision  of  Tier  2  CCPs  that 
present potentially more significant risks. 

Thus,  taking  account  of  the  number  of  third-country  CCPs  to  be  supervised  either 
indirectly or directly, type and complexity of tasks to be fulfilled for Tier 1 and Tier 2 
CCPs  respectively,  the  number  of  full  time  equivalents  needed  is  estimated  at 
approximately  49.  Overall the  additional  costs related  to the  preferred  options  for  CCP 
supervision should amount in the next few years to approximately €7 million per year. 

71 

 
Beyond  supervision-related  costs,  most  of  the  costs  clearing  counterparties  (clearing 
members  and  their  clients)  would  face  would  relate  to  the  introduction  of  a  location 
policy for Tier 2 CCPs, in any form envisaged under Section 5.3. These costs would be 
driven by  legal and operational  considerations as  well as,  if not properly calibrated,  by 
market  fragmentation  and  the  related  consequences  for  market  liquidity  and  execution 
prices. Positive or negative adjustments in margin efficiencies would largely depend on 
the ability of market participants to substitute third-country CCPs with CCPs established 
in the EU. The drivers of these costs are detailed under Section 5.3. 

In addition, a location policy that would not be tailored to the systemic risk of the third-
country CCP, defined according to objective criteria, could have an impact on the costs 
of  clearing,  the  access  to  indirect  clearing  for  clients  of  clearing  members  (including 
NFCs and Small Financial Counterparties) and therefore generally in the ability to hedge 
risks for EU counterparties. 

Impact on the EU budget 

Overall, the changes envisaged for the supervision of EU CCPs would have no impact on 
the  budget  of  the  EU,  as  any  additional  costs  such  as  extra  resources  for  the  European 
mechanism  would  be  covered  by  supervisory  fees  collected  from  CCPs.  Such  changes 
should,  however,  eventually  benefit  all  market  participants  and  member  states  as  they 
should  result  in  a  safer  clearing  market  within  the  EU.  Further  consideration  on  the 
financial  impact  of  strengthening  supervision  for  CCPs  established  inside  the  EU  are 
discussed in the sections below. 

Similarly,  the  changes  envisaged  to  mitigate  the  risks  posed  by  third-country  CCPs 
would also have no impact on the budget of the EU, as any additional resources for the 
European  mechanism  would  also  be  funded  through  the  collection  of  supervisory  fees 
from third-country CCPs. This would however be beneficial to the EU as it would reduce 
the  probability  of  importing  financial  stability  risks  inside  the  EU  and  ensure  that  EU 
counterparties  transacting  with  third-country  CCPs  operate  in  a  safe  environment, 
thereby promoting strong and stable global markets. 

6.1.  Small and medium-sized enterprises 

The  aim  of  the  proposal  is  to  maintain  EU's  financial  stability  as  a  whole.  Like  other 
businesses, SMEs will benefit from the increased stability of CCPs and the continuity of 
their key critical functions should a financial crisis occur in the future which would lead 
to their distress or failure. 

The  probability  of  such  as  crisis  occurring  should  be  further  reduced  through  the 
enhanced  ability  of  the  relevant  public  authorities  in  the  EU  to  prevent  the  build-up  of 
systemic  risk  within  EU  CCPs  and  to  mitigate  the  transmission  of  harmful  financial 
distress  through  third-country  CCPs.  As  a  result,  the  potential  for  negative  knock-on 
effects of a crisis affecting the financial sector – e.g. reduced readiness and/or capacity of 
the banking sector to provide financing to the real economy, recessions etc. – that tend to 
heavily impact SMEs and their ability to secure funding would also be reduced. 

In addition, by clarifying supervisory arrangements both for EU and third-country CCPs, 
and  in  combination  with  the  Commission's  recent  EMIR  REFIT  initiative  on  the 
reduction of excessive costs for smaller counterparties, the proposal should help promote 
further  the  use  of  central  clearing  and  facilitate  the  ability  of  SMEs  to  access  financial 
instruments,  either  to  hedge  their  transactions  or  to  invest.  The  proposal  will  therefore 

72 

 
facilitate  further  cross-border  transactions  within  the  EU,  thereby  contributing  to  the 
objectives of the Capital Markets Union. 

However, the costs associated with enhanced supervision of EU and third-country CCPs 
may  be  passed  on  to  the  ultimate  clients  of  CCPs  who  might  be  SMEs,  and  the  wider 
economy.  Still,  this  has  to  be  weighed  against  the  benefits  associated  with  better  crisis 
prevention,  facilitating  an  efficient  and  competitive  EU  CCP  market,  and  further 
developing the ability of SME's to access funding via the Capital Markets Union. 

6.2.  Administrative burden 

Administrative  burden  is  related  to  the  obligations  for  CCPs  to  provide  information  to 
public authorities as part of the supervisory arrangements. 

For  EU  CCPs,  the  costs  related  to  administrative  burden  are  likely  to  decrease,  as  the 
proposal will aim to clarify and streamline supervisory arrangements throughout the EU. 
This will bring further consistency in the way supervision is carried out throughout the 
EU, thereby reducing the level of interactions of CCPs with various NCAs across the EU. 
As  such,  the  expected  is  greater  legal  certainty  and  a  reduction  of  unnecessary 
administrative burdens. 

For  third-country  CCPs,  adjustment  costs  are  likely  to  occur  resulting  from  direct 
supervision  by  EU  authorities.  Those  costs  would  however  depend  on  their  degree  of 
systemic relevance for the EU. 

Since the proposed changes would be introduced in the EMIR Regulation, there would be 
no  additional  work  to  be  undertaken  by  Member  States  caused  by  the  transposition  of 
directives. 

6.3.  EU budget 

The above policy options would have no implication for the budget of the EU. 

Possible additional tasks arising for ESMA, such as the processing of the registration of 
third-country CCPs and their ongoing supervision, could lead to a need for an increase of 
ESMA’s planned resources. However, any additional costs for the EU budget would be 
alleviated by mechanisms to increase the financing of the European mechanism, such as 
the collection of fees  from the  EU-based and  third-country CCPs that it would directly 
supervise. 

6.4.  Social impacts 

The  preferred  options  are  expected  to  have  a  positive  social  impact,  consisting  of  the 
following aspects 

 

 

improved  level  of  financial  stability  –  enhanced  EU  supervision  and  more 
effective mitigation of third-country CCP risks helps ensure economic growth and 
jobs will be less at risk; 

increased protection for individuals and SMEs customers – lower probability of 
CCP failure helps maintain continuity of financial services in both wholesale and 
retail markets. 

As  far  as  the  clearing  sector,  or  more  generally  the  financial  sector,  is  concerned,  the 
preferred options are not expected to have a significant impact on job creation as CCPs 

73 

 
are not relying on extended human resources and already benefits from large economies 
of scale. 

6.5.  Impact on third countries 

International  commitments  taken  by  the  EU  at  the  G20  will  have  to  be  considered  to 
ensure that the implementation of the proposed policies is fully compatible with the EU's 
obligations. Since financial services operate within a global market, it will be important 
to monitor continually the implementation of cross-border arrangements with other G20 
members, to ensure that the EU is consistent with international standards, but is not, at 
the same time, placed at a competitive disadvantage (as market participants may simply 
move their business to a jurisdiction that has either weaker rules or none at all). 

Therefore, any potential loss of competitiveness or opportunities for regulatory arbitrage 
will  have  to  be  taken  into  account  when  deciding  on  the  best  way  to  implement  the 
desired policy initiatives. Particular attention will also need to be given to countries that 
are not part of the G20, as they are not bound by the Group's commitments. 

6.6.  Environmental impacts 

No significant environmental impact is expected. 

7.  MONITORING AND EVALUATION 

The envisaged  options aim at establishing  clear and coherent supervisory arrangements 
both for EU and third-country CCP. To this end, a number of amendments to EMIR are 
considered. 

The proposed legislative amendment to EMIR should include a provision stating that an 
evaluation of  EMIR in its entirety  should be carried out, with a particular focus on the 
effectiveness  and  efficiency  of  the  proposed  supervisory  arrangements  in  meeting 
EMIR's original objective to increase financial stability. 
The  operational  objectives  for  the  preferred  option  relating  to  the  supervision  of  EU 
CCPs are to: 

1.  Streamline CCP supervision in the EU; 
2.  Reflect adequately the mandate of ESMA, CBIs and national supervisors. 

The  operational  objectives  for  the  preferred  option  relating  to  the  supervision  of  third-
country CCPs are to: 

1.  Enhance mechanisms for EU supervisors and CBIs to address third-country CCP 

risks; 

2.  Ensure  a  level-playing  field  between  CCPs  established  in  the  EU  and  third-

country CCPs; 

3.  Provide for better ongoing enforcement and compliance of third-country CCPs. 
The evaluation should thus consider all aspects of EMIR, but in particular the following 
elements: 

74 

 
 
 
 
 
 
Indicator 

Target 

Estimated costs to EU counterparties. 

Minimal adjustment costs 

Number  of  CCPs  that  have  entered  into 
recovery or resolution. 

0 

Number  of  on-site  inspections  of  third-
country CCPs 

5 per year 

Number of recognised third country CCPs 

10 

Number  of  infringements  of  equivalence 
third 
and/or  recognition  conditions  by 
country CCPs 

5 

for  monitoring 

Data 
provided by: 

Questionnaire to be sent to 
clearing members and CCPs. 

National authorities and CBIs 

Executive Session 

Executive Session 

Executive Session 

In  principle,  this  evaluation  should  take  place  at  least  5  years  after  the  application  of 
these amendments. 

The  evaluation  should  seek  to  collect  input  from  all  relevant  stakeholders,  but  in 
particular  CCPs,  clearing  members,  non-financial  counterparties,  small  financial 
counterparties  and  in  general  clients  and  indirect  clients  of  clearing  members.  Input 
would  also  be  required  from  ESMA  as  well  as  national  authorities  and  central  banks. 
Statistical data for the analysis should be sought from ESMA. 

75 

 
 
 
 
 
 
ANNEX  1:  OVERVIEW  OF  CHANGES  ADDRESSING  THE  RECOMMENDATIONS  OF 
REGULATORY SCRUTINY BOARD (RSB) 

The  main  changes  addressing  the  recommendations  of  the  Regulatory  Scrutiny  Board 
relate to the following issues: 

1. Specific systemic risks linked to the UK's withdrawal from the EU: Further description 
of  the  changes  relating  to  the  withdrawal  of  the  UK  from  the  EU  in the  section  on  the 
baseline scenario as part of the chapter on policy options.  

2.  Preferred  policy  option  for  mitigation  of  third-country  CCP  risks:  More  detailed 
description of how option 3 relating to supervision based on criteria or thresholds would 
work in practice for third-country CCPs, depending on the risks that they would pose to 
the EU. 

3. Impact of the preferred policy options on systemic risks: More detailed description of 
the role of CBIs regarding EU and non-EU CCPs. Clarification that the trade-off between 
supervisory burden and financial stability would be proportionate to the EU's exposure to 
third-country CCP risks. Explanation that a targeted location policy would reduce costs 
to a minimum. 

4.  Other  issues:  (i)  clarification  of  how  the  decision-making  process  in  the  Executive 
Session  would  work  compared  to  that  of  the  current  colleges;  (ii)  definition  of 
operational  objectives  in  the  chapter  on  monitoring  and  evaluation;  and  (iii)  further 
explanation of why there is no formal evaluation of EU CCPs as an Annex to the impact 
assessment report. 

76 

 
ANNEX 2: OVERVIEW OF THE DERIVATIVES MARKET AND OF THE CCP LANDSCAPE 

1.  The derivatives market 

1.1. What are derivatives? 

Derivatives are financial contracts used for redistributing risk and constitute an essential 
building block of a modern financial system. They owe their name to the fact that their 
value  is  derived  from  an  underlying  (e.g.  the  price  of  a  share  of  a  publicly  traded 
company). Since they redistribute risk, they can be used either to insure (hedge) oneself 
against a particular risk or, conversely, to take on risk (invest or speculate). They can also 
be used to arbitrage between different markets. 

Derivatives range from those with fully standardised parameters, such as notional value 
or maturity, to those that are tailored to the specific needs of a particular user. The type 
of  derivative  usually  also  determines  how  a  derivative  is  traded:  fully  standardised 
derivatives are  typically traded  on organised trading  venues, i.e.  derivatives  exchanges, 
while customised (or bespoke) derivatives are traded bilaterally, i.e. off-exchange or over 
the counter (OTC). 

The definition of OTC derivatives in EMIR refers to all derivatives contracts which are 
not "executed on a regulated market". As a result, all derivative contracts executed on a 
venue of execution which is not a regulated market (e.g. a Multilateral trading facility) 
are considered as OTC derivative contracts under EMIR. 

As  shown  in  Chart  A-2/1  below,  the  outstanding  notional  of  over  the  counter  (OTC) 
derivatives  amounted  to  USD  544.1  trillion,  corresponding  to  89%  of  the  overall 
derivatives market, at end-June 2016. 

Chart A-2/1: Exchange-traded and OTC derivatives as of end-June 2016 

Source: Bank for international settlements138 
The  most  common  types  of  derivatives  traded  on  an  exchange  are  futures  and  options, 
while  the  most  common  types  of  OTC  derivatives  are  swaps,  forwards  and  (exotic) 
options.  OTC  derivatives  are  generally  divided  into  five  broad  segments  based  on  the 

138  See  Bank  for  International  Settlements, Triennial  Central  Bank Survey  -  OTC  derivatives  positions  at end-June 
2016, 

Department, 

December 

Economic 

Table 

11 

1, 

2016, 
http://www.bis.org/publ/otc_hy1612/triensurvstatannex.pdf  

Monetary 

and 

77 

 
 
 
                                                 
relevant  underlying:  foreign-exchange  derivatives,  interest-rate  derivatives,  equity 
derivatives, commodity derivatives and credit derivatives. Interest rate derivatives (IRS) 
are by far the largest segment, followed by foreign exchange derivatives (FX) and credit 
derivatives (CDS). 

Chart A-2/2: European OTC derivatives market by asset class (percentage of 
notional amount outstanding on 1 July 2016) 

Source: EMIR public data, published on TRs' websites139 

1.2. Recent trends in the derivatives market 

Following the commitment of G20 leaders in September 2009 that all standardised OTC 
derivatives should be cleared through central counterparties, the percentage of centrally 
cleared transactions has increased significantly. While end of 2009 about 36% of interest 
rate OTC derivatives had been centrally cleared, at the end of 2015 this percentage had 
gone  up  to  60%.  For  credit  OTC  derivatives  the  percentage  of  centrally  cleared 
transactions went up from about 12% to 45% in the same period. 

Trading  statistics  are  based  on  the  location  of  the  primary  intermediaries  that  have 
registered  the  derivatives  contracts  with  their  counterparties  and  do  not  necessarily 
coincide with the clearing location. As far as trading is concerned, according to the 2016 
triennial BIS derivatives survey, the US market is the most important OTC interest rate 
derivatives market with a daily average turnover of around USD 1.24 trillion (41%).  The 
UK  comes  second  with  USD  1.18  trillion  (39%).  Other  leading  European  markets  are 
France (USD 141 billion or 5%) and Germany (USD 31 billion or 1%)140. As regards the 
OTC  FX  derivatives  market,  the  UK  market  is  the  world's  largest  market  with  a  daily 
average  turnover  of  around  USD  2.4  trillion  (37%),  followed  by  the  US  with  USD  1.3 
trillion  (19%).  Other  leading  EU  markets  are  France  (USD  181  billion  or  3%)  and 
Germany (USD 116 billion or 2%)141. The UK is a clear global market leader in trading 

139   "Looking back at OTC derivative reforms – objectives, progress and gaps", ECB Economic Bulletin 

Issue 8, 2016, 20.12.2016,  
available at https://www.ecb.europa.eu/pub/pdf/other/eb201608_article02.en.pdf  

140  See Bank for International Settlements, Triennial Central Bank Survey of foreign exchange and OTC derivatives 

markets in 2016, table D.12.2, http://www.bis.org/statistics/d12_2.pdf  

141  See  Bank 

for 

International  Settlements,  Triennial  OTC  derivatives  statistics  2016, 

table  D.11.2, 

http://www.bis.org/statistics/derstats3y.htm 

78 

 
 
                                                 
of euro-denominated interest rate derivatives with a daily turnover of USD 574 billion142; 
before France, Netherlands, Germany, Belgium, Italy and the US respectively143. 

The EU has adopted three central clearing determinations, on the basis of proposals by 
ESMA.  The  determinations  cover  two  different  asset  classes:  OTC  interest  rate 
derivatives and OTC credit derivatives. 

The central clearing determination covering OTC interest rate swaps (IRS) related to the 
Euro, the USD, the Yen, and the British Pound has started to apply to clearing members 
(as of 21 June 2016) and financial counterparties above the EUR 8 billion threshold (as 
of 21 December 2016). For other IRS in European currencies (Norwegian Krone, Polish 
Zloty, and Swedish Krona) and Credit Default Swaps (CDS), the application has started 
phasing-in as of February 2017 for clearing members. The compliance deadlines for the 
central clearing determination applying to various asset classes and to different types of 
counterparties are summarised in the tables below. 

Table  A-2A/1  -  First  Commission  Delegated  Regulation  covering  interest  rate 
derivatives in the G4 currencies 

Source: European Securities and Markets Authority 

Table A-2/2– Second Commission Delegated Regulation covering European index 
CDS 

Source: European Securities and Markets Authority 

142  Forward rate agreements, swaps, options and other products. Adjusted for local inter-dealer double-counting (i.e. 

"net-gross" basis). 

143  See: Bank for International Settlements, Triennial Central Bank Survey, Interest rate derivatives market turnover 

in 2016, Table 3.2, Monetary and Economic Department, September 2016 

79 

 
 
                                                 
Table  A-2/3  -  Third  Commission  Delegated  Regulation  covering  interest  rate 
derivatives in NOK, PLN and SEK 

Source: European Securities and Markets Authority 

2.  Overview of the CCP landscape in Europe 

The European Market Infrastructure Regulation (EMIR) implemented the commitment of 
the  G20  leaders  in  September  2009  that  all  standardised  OTC  derivatives  should  be 
cleared through central counterparties (CCPs). 

2.1 CCPs established in the EU 

Table A-2/1 offers an overview of the 17 CCPs that are currently active in the EU144 and 
are  authorised  under  EMIR,  with  the  respective  number  of  clearing  participants  (major 
banks) for each of them at the end of 2015. They are located across 12 Member States145. 
One more CCP not yet authorised under EMIR is active in Croatia. 

These CCPs vary in size, instruments admitted to clearing and geographical importance 
in terms of clearing members (i.e. national versus foreign) and markets served. 

Table A-2/1: CCPs active in Europe and number of participants as of 
December 2016 
Source: ECB, ESMA, CCPs' websites 

Denomination 

Country 

Eurex Clearing AG 
European Commodity Clearing 
Hellenic Exchanges SA 
(Athexclear) 
BME Clearing 
OMIClear 
LCH Clearnet SA 
CC&G 

DE 
DE 
EL 

ES 
PT 
FR 
IT 

Number of 
participants 
186 
23 
25 

EMIR 
authorisation146 
YES 
YES 
YES 

60 
32 
110 
82 

YES 
YES 
YES 
YES 

144  As per the register provided by ESMA in relation to Article 13 (2) of the MiFID implementing Regulation (No 

1287/2006 of 10 August 2016). 

145  As per the list maintained by ESMA for the purposes of Articles 88(1)(c) and (e) of Regulation (EU) No 648/2012 

(EMIR). 
Insofar the clearing activities of the related CCP concern a product for which a clearing obligation is applicable. 

146 

80 

 
                                                 
European Central Counterparty 
NV 
ICE Clear Netherlands 
CCP 
Keler Zrt. 
KDPW CCP SA 
Nasdaq OMX DM 
LCH Clearnet Ltd 
ICE Clear Europe 
CME CE 
LME Clear Ltd 
SKDD CCP Smart Clear d.d. 

NL 

NL 
AT 
HU 
PL 
SE 
UK 
UK 
UK 
UK 
HR 

45 

3 
70 
25 
43 
92 
154 
79 
19 
42 

YES 

YES 
YES 
YES 
YES 
YES 
YES 
YES 
YES 
YES 
NO 

As can be seen, Germany, France and the UK are the home countries of major CCPs in 
Europe  as  well  as  internationally.  The  UK  is  home  to  LCH  Clearnet  Ltd,  ICE  Clear, 
CME and LME. Germany's largest CCP is Eurex, while France is home to LCH Clearnet 
SA. 

Table A-2/5 below highlights that EU CCPs clear a variety of product classes, from listed 
and OTC financial and commodity derivatives to cash equities, bonds and repos. 

Table A-2/5: Product types cleared by a selection of EU CCPs 

81 

 
 
 
Source: ESMA147 

2.2 Third-country CCPs recognised by ESMA to operate in the EU 

In  addition  to  the  17  CCPs  established  in  the  EU,  28  third-country  CCPs  have  been 
recognised by ESMA to date to provide clearing CCPs to EU counterparties. 

Table A-2/6: List of CCPs established in a third country and recognised by ESMA 

Name of the CCP 

Country of Establishment  Date of recognition 

ASX Clear (Futures) Pty Limited  Australia 

ASX Clear Pty Limited 

Australia 

27 April 2015 

27 April 2015 

Hong Kong Securities Clearing 
Company Limited 

Hong Kong 

27 April 2015 

HKFE Clearing Corporation 
Limited 

OTC Clearing Hong Kong 
Limited 

The SEHK Options Clearing 
House Limited 

Japan Securities Clearing 
Corporation 

Hong Kong 

27 April 2015 

Hong Kong 

27 April 2015 

Hong Kong 

27 April 2015 

Japan 

27 April 2015 

Tokyo Financial Exchange 

Japan 

Central Depository (Pte) Limited 

Singapore 

Singapore Exchange Derivatives 
Clearing 

Singapore 

27 April 2015 

27 April 2015 

27 April 2015 

ICE Clear Singapore 

Singapore 

24 September 2015 

147   ESMA,  List  of  Central  Counterparties  authorised  to  offer  services  and  activities  in  the  Union, 

September 2016. 

82 

 
                                                 
JSE Clear 

South Africa 

27 January 2016 

ICE Clear Canada 

Canada 

Natural Gas Exchange Inc. 

Canada 

Canadian Derivatives Clearing 
Corporation 

Asigna Compensacion y 
Liquidacion 

Canada 

Mexico 

27 January 2016 

27 January 2016 

27 January 2016 

27 January 2016 

SIX x-clear AG 

Switzerland 

23 March 2016 

Korea Exchange, Inc 

South Korea 

22 April 2016 

Chicago Mercantile Exchange, 
Inc. 

United States of America 

13 June 2016 

ICE Clear Credit LLC 

United States of America 

28 September 2016 

Minneapolis Grain Exchange, Inc.  United States of America 

28 September 2016 

ICE Clear US, Inc. 

United States of America 

14 December 2016 

Dubai Commodities Clearing 
Corporation 

United Arab Emirates 

29 March 2017 

The Clearing Corporation of India 
Ltd 

India 

29 March 2017 

Nasdaq Dubai Ltd 

Dubai International Financial 
Centre 

29 March 2017 

Japan Commodity Clearing House 
Co., Ltd. 

Japan 

29 March 2017 

BM&FBovespa S.A. 

Brazil 

29 March 2017 

Nodal Clear, LLC 

United States of America 

29 March 2017 

Source: Commission staff, based on ESMA148 

Despite having 45 operating CCPs, the sheer volume of transactions now being centrally 
cleared means that central clearing markets are generally concentrated in the EU and are 
highly concentrated in respect of some asset classes. 

148   ESMA,  List  of  third-country  central  counterparties  recognised  to  offer  services  and  activities  in  the 

Union, March 2017.  

83 

 
 
                                                 
2.3 A highly interconnected market 

CCPs  operating  within  the  EU  are  highly  interconnected.  Many  of  the  largest  global 
banks are members of multiple CCPs operating in the EU, illustrating the intrinsic cross-
border nature of central clearing. For example, 24 globally systemically important banks 
(G-SIBs)  are  members  of  the  Frankfurt-based  CCP  Eurex  Clearing  AG,  while  many 
individual G-SIBs have multiple CCP membership. 

Figure A-2/3: Interconnectedness of CCPs via their clearing members 

Source: ESMA, Report EU-wide CCP Stress test 2015, 29 April 2016, 2016/658, page 32 

84 

 
 
 
 
ANNEX 3: PROCEDURAL INFORMATION 

This  Annex  outlines  the  procedural  information  concerning  the  process  to  prepare  the 
impact assessment report and the related initiative: 

  Lead  Directorate-General:  Directorate-General  for  Financial  Stability,  Financial 

Services and Capital Markets Union. 

  The  initiative  is  listed  in  the  Commission's  Agenda  planning  under  the  reference 
PLAN/2017/1166  -  Further  amendments  to  the  European  Market  Infrastructure 
Regulation (EMIR). 

  Organisation and timing of Inter Service Steering Group’s meetings:  three meetings 
on  20  April,  4  May,  and  16  May  2017.  The  Inter  Service  Steering  Group  included 
representatives  of  the  Directorates  General  Competition  (COMP),  Economic  and 
Financial Affairs (ECFIN), Trade (TRADE), the Task Force for the Preparation and 
Conduct of the Negotiations with the United Kingdom under Article 50 TEU (TF50), 
the Legal Service (LS), and the Secretariat General (SG). 

  Evidence used in the impact assessment: 

  Replies by stakeholders to the following public consultations:  

  From  21  May  2015  to  13  August  2015:  a  public  consultation  in  the 
framework of the EMIR Review to obtain feedback from stakeholders 
on 
of  EMIR, 
the 
http://ec.europa.eu/finance/consultations/2015/emir-
revision/index_en.htm  

implementation 

experiences 

their 

in 

  From 20 January 2017 to 17 March 2017: a public consultation on the 
capital  markets  union  (CMU)  mid-term  review  to  seek  feedback  on 
how  the  current  CMU  programme  can  be  updated  and  completed  so 
that  it  represents  a  strong  policy  framework  for  the  development  of 
capital  markets,  https://ec.europa.eu/info/finance-consultations-2017-
cmu-mid-term-review_en  

  From  21  March  2017  to  17  May  2017:  a  public  consultation  on  the 
operations  of  the  European  Supervisory  Authorities  (ESAs)  to  seek 
views  from  stakeholders  on  areas  where  the  effectiveness  and 
efficiency  of 
improved, 
the  ESAs  can  be  strengthened  and 
https://ec.europa.eu/info/finance-consultations-2017-esas-
operations_en 

  Reports  from  European  Securities  and  Markets  Authority  (ESMA): 

https://www.esma.europa.eu  

  Publications by the European Systemic Risk Board (ESRB): 

https://www.esrb.europa.eu/pub/pdf/occasional/20160922_occasional_paper_
11.en.pdf?c067e1f68ae0fe23925b88c613c546a8;  
https://www.esrb.europa.eu/pub/pdf/commentaries/ESRB_commentary_1311.
pdf?c7bdc8da2a559dc321fd51018bfc9502; 
https://www.esrb.europa.eu/pub/pdf/other/2016-01-
14_Interoperability_report.pdf  

  Articles  published  in  the  European  Central  Bank  (ECB)  Economic  Bulletin: 

https://www.ecb.europa.eu/pub/pdf/other/eb201608_article02.en.pdf 
https://www.ecb.europa.eu/press/key/date/2017/html/ecb.sp170420_tBdF-
FSR21.en.pdf  

85 

 
 
 
 
 
  The 

EMIR 

review 

report: 

http://ec.europa.eu/finance/financial-

markets/docs/derivatives/161123-report_en.pdf  

  Targeted discussions with experts from EU and Member States' authorities 
  Statistics and reports published by the Financial Stability Board (FSB) and the 

Bank of International Settlements (BIS). 
the 

  Research 

by 

(ISDA): 
http://www2.isda.org/attachment/Nzk2NA==/Market%20fragmentation%20O
ct15%20FINAL.pdf  

International  Derivatives  Association 

  Desk research by Commission services. 

86 

 
 
 
ANNEX 4: STAKEHOLDER CONSULTATION  

This  annex  outlines  the  consultation  strategy  followed  to  inform  key  elements  of  the 
impact assessment. It provides an overview of the input received from stakeholders via 
the  public  consultations  on  the  EMIR  review,  on  the  operations  of  the  European 
Supervisory  Authorities  (ESAs)  and  on  the  capital  markets  union  (CMU)  mid-term 
review.  It  also  refers  to  the  feedback  received  following  the  publication  of  the 
Commission's Communication on responding to challenges for critical  financial market 
infrastructures and further developing the CMU and the Staff Working Document (SWD) 
on EU equivalence decisions in financial services policy. 

1.  Overview of the consultation strategy 

Both  public  and  targeted  consultations  have  informed  the  key  areas  of  this  impact 
assessment. 

First,  the  impact  assessment  takes  into  account  views  from  stakeholders  and  public 
authorities  in  response  to  the  publication  of  the  Commission's  Communication  on 
responding  to  challenges  for  critical  financial  market  infrastructures  and  further 
developing the CMU of 4 May 2017149. The Communication considers that, in view of 
the challenges in the area of derivatives clearing, further changes are necessary 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 CMU. 
The  Communication  invited  stakeholders  to  provide  their  views  on  this  approach  and 
generated  significant  attention  and  targeted  input  from  both  public  authorities  (e.g. 
national,  EU  and  third-country  authorities  and  institutions)  and  the  industry  (e.g. CCPs 
and clearing members). 

Second,  the  impact  assessment  relies  on  comments  specific  to  EMIR  and  CCP 
supervision as part of the consultation on the operations of the ESAs that was open from 
21  March  to  17  May  2017150.  The  consultation  sought  to  build  a  clearer  overview  of 
areas  where  the  effectiveness  and  efficiency  of  the  ESAs  could  be  strengthened  and 
improved. In particular, the supervision of CCPs was one of the three examples given in 
the  consultation  document  to  illustrate  some  of  the  reasons  that  may  justify,  in  certain 
market  segments,  a  reflection  on  a  possible  extension  of  ESMA's  current  mandate  to 
accompany the building up of the CMU151. 

Third,  the  impact  assessment  takes  into  account  comments  focused  on  supervisory 
convergence as part of the consultation on the CMU mid-term review, which was open 
from  20  January  2017  to  17  March  2017 152 .  The  consultation  sought  the  views  of 
stakeholders on how the current CMU programme can be updated and completed so that 
it  represents  a  strong  policy  framework  for  the  development  of  capital  markets.  The 
consultation generated 178 responses. 

149  Communication  from  the  Commission  to  the  European  Parliament,  the  Council,  and  the  European 
Central  Bank  on  Responding  to  challenges  for  critical  financial  market  infrastructures  and  further 
developing the Capital Markets Union, Brussels, 4.5.2017, COM(2017) 225 final.  

150   The consultation and the related feedback statement can be found at:  

https://ec.europa.eu/info/finance-consultations-2017-esas-operations_en 

151   See Section C on 'Direct supervisory powers in certain segments of capital markets' in the consultation 
document:https://ec.europa.eu/info/sites/info/files/2017-esas-operations-consultation-document_en.pdf   

152   The consultation can be found at: https://ec.europa.eu/info/finance-consultations-2017-cmu-mid-term-

review_en  

87 

 
                                                 
Fourth,  the  impact  assessment  builds  on  contributions  specific  to  EMIR's  supervisory 
arrangements as part of the EMIR review consultation that was open between May and 
August  2015.  The  consultation  generated  more  than  170  contributions  from  a  broad 
range of stakeholders and public authorities153.  

Fifth, the impact assessment takes into account comments related to CCP equivalence as 
part of the informal reactions to the publication of the Staff Working Document (SWD) 
on EU equivalence decisions in financial services policy: an assessment, published on 27 
February 2017154. The SWD provided a factual overview of third-country provisions in 
EU financial services legislation and took stock of the Commission's experience with the 
equivalence  framework.  The  SWD  generated  a  number  of  reactions  from  third-country 
authorities  and  market  participants  as  part  of  a  general  debate  on  the  EU's  equivalence 
regime. 

No  public  consultation  was  carried  out  specifically  for  the  purpose  of  this  impact 
assessment. This can be explained by the fact that the ESA consultation, which offered 
an opportunity to provide views on the supervision of CCPs, was already open when the 
initiative  was  announced  (i.e.  ESA  consultation).  In  addition,  relevant  consultations 
seeking views on the EMIR supervisory architecture and on supervision in the context of 
the CMU had been carried out recently (i.e. CMU consultation, which closed in March 
2017  or  the  EMIR  consultation,  which  led  to  the  adoption  of  a  report  on  the  EMIR 
review in November 2016). 

As a result, substantial input from a broad range of stakeholders has been available to the 
services of the Commission and helpful to inform the impact assessment. including from 
industry representatives (e.g. financial market infrastructures, dealers, clearing members, 
clients and indirect clients such as financial and non-financial companies), Member State 
and  EU  authorities  (e.g.  ESMA,  finance  ministries,  central  banks,  and  national 
supervisory authorities), as well as third-country authorities and market participants. 

2.  Stakeholder consultation in the framework of the EMIR Review 

2.1 Relevant comments from the consultation on the EMIR Review 

The Commission carried out a public consultation as part of the EMIR review between 
May  and August 2015. The consultation  generated more than 170  contributions from a 
broad range of stakeholders and public authorities. 

Overall, respondents highlighted that most of the requirements of EMIR have started to 
apply  only  recently,  and  that  it  would  therefore  be  premature  to  consider  a  complete 
overhaul of the existing supervisory architecture. 

1) On the supervision of CCPs established in the EU and the functioning of the colleges 

Respondents supported the objective of the supervisory colleges introduced by EMIR as 
it  aims  to  ensure  a  level  playing  field  amongst  the  European  CCPs  as  well  as 
homogeneity  in  the  application  of  regulation  across  the  European  Union.  They  pointed 
out  that  colleges  allow  experience-sharing  and  improve  cooperation  among  relevant 

153  The 

consultation 

responses 
http://ec.europa.eu/finance/consultations/2015/emir-revision/index_en.htm 

summary 

and 

the 

the 

of 

can 

be 

found 

at 

154   Commission  Staff  Working  Document,  EU  equivalence  decisions  in  financial  services  policy:  an 
assessment, SWD(2017) 102 final, 27.2.2017, available at https://ec.europa.eu/info/sites/info/files/eu-
equivalence-decisions-assessment-27022017_en.pdf  

88 

 
                                                 
authorities,  and  are  thus  of  importance  for  financial  stability  in  the  relevant  Member 
States, striking the adequate balance in ensuring an appropriate role for the home national 
competent  authorities.  No  respondents  expressed  objections  to  the  establishment  of 
supervisory colleges. 

Respondents  pointed  out,  however,  that  while  colleges  work well  in  general, there  was 
still some room for improvement, in particular when it comes to the validation of models 
and  parameters  and  the  extension  of  services.  Moreover,  a  majority  of  respondents 
pointed out the length of the approval processes, with some respondents underlining that 
in some cases the timeline for approval could be postponed indefinitely by the national 
competent  authority,  giving  rise  to  legal  uncertainty.  Additionally  some  respondents, 
mostly market infrastructures and authorities, pointed out the unclear position of ESMA 
in  particular  with  regard  to  the  processes  related  to  the  extension  of  activities  and 
services of a CCP and the review of a CCP's risk models. 

Some industry associations and one market infrastructure operator pointed out the need 
for  more  transparency  in  the  functioning  of  colleges,  not  only  towards  CCPs  for  the 
authorisation and extension of services processes but also towards CCPs' users in order to 
allow them to get more visibility of the authorisation process and its consequences (i.e. 
entry into force of EMIR requirements, potential clearing obligations, etc.). In particular, 
they  suggested  that  EMIR  should  require  the  competent  authority  to  publicly  disclose 
when a CCP's authorisation application has been deemed complete. 

A  number  of  authorities,  industry  participants,  and  market  infrastructure  operators 
suggested that EMIR should clarify the modalities for the college process, in particular 
the  roles  and  responsibilities  of  different  college  members.  Several  authorities  and 
industry  participants,  and  market  infrastructure operators  also  asked  for  more  clarity  in 
the  process  and  timeframe  for  the  authorisation  and  extension  of  services  provided  by 
CCPs. 

In  addition,  two  investment  managers  expressed  the  view  that  the  number  of  national 
competent authorities (NCAs) within the college should be large, as many countries are 
concerned with the cross-border activities of CCPs. 

2) On the recognition of third-country CCPs and relations with third countries 

The  questions  in  the  consultation  on  the  EMIR  Review  were  not  specific  to  CCPs  and 
some  responses  overlaps  with  responses  on  risk-mitigations  techniques  for  OTC 
derivatives not cleared by a CCP. However, the majority of respondents to this question, 
including  companies,  industry  associations,  and  public  authorities  considered  that  there 
were  provisions  or  definitions  within  EMIR  that  pose  challenges  for  EU  entities  when 
transacting on a cross-border basis. 

Specifically, industry associations considered that the European Commission was taking 
too  long  to  complete  its  equivalence  assessments  under  EMIR.  The  same  industry 
associations,  as  well  as  companies,  indicated  that  further  harmonisation  of  EMIR  with 
liquidity 
regulations 
fragmentation as a result of differing rules. 

third  countries  was  needed,  noting 

the  possibility  of 

in 

Most respondents, mainly companies from the financial sector and industry associations, 
considered  that  some  provisions  within  EMIR  created  a  disadvantage  for  EU 
counterparties  over  non-EU  entities.  They  principally  indicated  that  the  stringency  of 
some  EU  requirements  compared  to  requirements  in  other  jurisdictions  could  lead  to 
regulatory  arbitrage.  Furthermore  respondents  pointed  out  the  fact  that  the  equivalence 

89 

 
regime  for  CCPs  as  developed  in  EMIR  de  facto  created  a  situation  where  the 
requirements  for  EU  CCPs  are  heavier than  third-country CCPs,  leading  to  an  un-level 
playing field detrimental to EU CCPs. 

2.2 Input from ESMA on the third-country recognition process under EMIR 

ESMA  issued  four  separate  reports  as  part  of  the  EMIR  review,  focused  on  various 
aspects  of  the  regulation.  In  particular,  one  of  the  reports  raised  concerns  over  the 
recognition process for third-country CCPs under EMIR155. 

Article 25 of EMIR provides that ESMA may recognise a CCP where the four conditions 
listed  in  Article  25(2)  are  met  and  that  ESMA  may  withdraw  recognition  where  those 
conditions are no longer met. 

Based  on  ESMA's  experience,  it  raised  a  series  of  concerns  about  the  process  of 
recognition of third-country CCPs. 

First,  ESMA  argued  that  the  process  is  rigid  and  burdensome,  as  demonstrated  by  the 
limited  number  of  recognition  decisions  taken  in  2015.  Three  years  after  the entry  into 
force  of  EMIR,  ESMA  noted  that  the  majority  of  the  third-country  CCPs  were  still 
operating  under  a  transitional  regime.  ESMA  argued  that  this  put  at  risk  European 
clearing  members  and  their  subsidiaries  clearing  with  these  third-country  CCPs  and 
creates the potential for regulatory arbitrage between European and third-country CCPs. 

Second,  ESMA  highlighted  that  the  European  approach  toward  third-country  CCPs  is 
extremely open, with full reliance on third country rules and supervisory arrangements. 
The cooperation arrangements that ESMA concluded and will continue to conclude give 
ESMA limited powers to intervene should an emergency situation arise in a third-country 
CCP. 

Third, ESMA raised concerns about the absence of a provision in EMIR that would allow 
it to deny recognition on the basis of a material risk emerging from its review of a CCP 
application  under  Article  22,  even  though  the  4  conditions  from  Article  25(2)  are  met. 
While it cannot be ruled out that it may spot a significant risk through the processing of 
the  applications  for  a  specific  the  third-country  CCP,  or  that  the  consulted  authorities 
may  flag  significant  concerns,  ESMA  indicated  that  it  has  no  option  other  than  to 
recognise the applicant CCP as long as the four conditions are met. 

Fourth, ESMA raised significant differences between the EU's approach to equivalence 
and recognition, and that of other countries. ESMA highlighted that the majority of third-
country jurisdictions consider third-country CCPs as systemically relevant infrastructures 
and apply to them closer scrutiny. In general, the process envisages a full registration in 
the  relevant  jurisdiction  and  that  while,  as  part  of  such  authorisation  process,  the  third 
country authority may decide to rely on certain rules of the home jurisdiction of the CCP 
and of certain cooperation arrangements with the home authority of the CCPs, the CCP 
would  become  subject  to  the  rules  and  the  authority  of  the  jurisdiction  registering  it. 
Therefore, ESMA argued that, although the current EU  approach  should be a model in 
terms of mutual reliance, if the EU remains the only jurisdiction relying extensively on 

155   See  EMIR  Review  Report  no.4  of  13  August  2015,  as  part  of  the  Commission  consultation  on  the 

EMIR Review, pp. 19-21, available at: 
 https://www.esma.europa.eu/sites/default/files/library/2015/11/esma-2015-1254_-
_emir_review_report_no.4_on_other_issues.pdf  

90 

 
                                                 
third  country  rules  and  authorities,  this  might  put  it  at  risk  and  does  not  benefit  CCPs 
established in the EU. 

On  this  basis,  ESMA  indicated  that  the  review  of  EMIR  provides  an  opportunity  to 
rethink the approach toward third-country CCPs. Considerations should be given to the 
following: 

-  Whether to keep a system of full reliance on third country rules and supervisory 
arrangements, or whether a system like the one applicable in the majority of the 
third countries should be envisaged; 

- 

the  system  of  equivalence 

If 
is  maintained,  whether  such  equivalence 
determinations should be rather adopted via Regulatory Technical Standards. This 
would  provide  for  technical  considerations  to  be  fully  reflected  and  it  would 
ensure  a  more  defined  calendar.  Whichever  legislative  process  is  decided  upon, 
ESMA  argued  that  it  would  be  important  to  ensure  the  equivalence  assessment, 
while being outcome-based, is sufficiently granular and, where necessary, is able 
to contain conditions to mitigate possible risks for European market participants. 

Should the process for the recognition be maintained as under the current EMIR, ESMA 
argued that it should as a minimum be complemented with a defined legal basis for not 
recognising a CCP. In particular, the Commission could consider revising Article 25 in 
order to: 

- 

Identify  the  circumstances  under  which  ESMA  may  decide  not  to  recognise  a 
third-country CCP (even though the four conditions set out in Article 25 are met). 

-  Foresee  that  the  review  of  recognition  under  Article  25(5)  with  respect  to  the 
extension of activities and services in the Union should be performed ex-ante and 
not  ex-post.  For  instance,  it  could  be  foreseen  that  information  on  extension  of 
activity should be provided prior to the actual extension rather than afterwards, to 
allow ESMA to react efficiently. 

-  Establish  that  the  conditions  (a)  and  (d)  in  Article  25(2)  shall  be  met  before  a 

third-country CCP can submit an application for recognition. 

-  Reconsider whether for the assessment of the four conditions currently envisaged 
under EMIR, the wider consultation of many European and national authorities is 
valuable. 

ESMA also pointed out that the recognition of third country CCPs implies a significant 
administrative  burden.  Therefore,  in  line  with  other  direct  responsibilities  ESMA 
performs,  fees  for  recognition  of  third-country  CCPs  should  be  envisaged  to  cover 
ESMA's costs. 

3.  CCP-related responses to the consultation on the operations of the ESAs 

The Commission conducted a consultation on the operations of the ESAs from 21 March 
to 17 May 2017156.  The consultation sought to build a clearer overview of areas where 
the effectiveness and efficiency of the ESAs could be strengthened and improved. In this 
context,  the  Commission  received  comments  specific  to  EMIR  and  CCP  supervision, 

156   The consultation and the related feedback statement can be found at:  

https://ec.europa.eu/info/finance-consultations-2017-esas-operations_en 

91 

 
 
                                                 
notably  as  part  of  a  section  seeking  views  on  whether  ESMA  should  have  additional 
direct supervisory powers in certain segments of capital markets, in addition to those that 
ESMA currently enjoys for credit rating agencies and trade repositories. In particular, the 
consultation cited the supervision of CCPs as one of the three examples that may justify, 
in  certain  market  segments,  a  reflection  on  a  possible  extension  of  ESMA's  current 
mandate to accompany the building up of the CMU157. 

The  Commission  had  not  published  a  summary  of  responses  to  this  consultation  at  the 
time  of  finalisation  of  this  impact  assessment.  However,  this  section  provides  an 
overview of CCP-relevant comments. 

Overall, about 40 respondents provided views on the questions related to the extension of 
ESMA's  supervisory  powers  with  a  specific  focus  on  CCPs.  They  include  a  range  of 
stakeholders,  the  majority  of  which  are  organisations  and  companies,  industry 
associations  and  SMEs,  operating  mainly  in  the  area  of  market  infrastructure  and 
banking.  About  a  dozen  public  authorities  and  international  organisations  also  shared 
their views. 

3.1. CCP-related responses regarding ESMA's supervisory powers 

A vast majority of the stakeholders representing an organisation or a company suggested 
that the supervision of CCPs should be further centralised at the level of ESMA, in order 
to  improve  the  current  regime  which  they  see  as  fragmented  and  inefficient.  Many 
respondents  argued  that,  since  the  operations  of  CCPs  go  beyond  national  levels, 
supervision  should  not  be  conducted  only  by  national  competent  authorities  (NCAs). 
Increased cross-border activity, the systemic importance of CCPs, and access to liquidity 
in the euro area were cited as factors justifying the need for ESMA's supervisory powers 
to be further extended. 

Respondents  generally  outlined  the  following  advantages  in  favour  of  the  extension  of 
the  direct  supervisory  powers  of  ESMA  over  CCPs:  (i)  uniform  application  of  EMIR 
throughout the EU; (ii) avoidance of regulatory arbitrage; and (iii) avoiding complexities 
in the event of a CCP resolution when several NCAs with conflicting priorities might be 
involved.  Moreover,  respondents  underlined  that  the  extension  of  ESMA's  supervisory 
powers  could  enhance  supervisory  cooperation  with  third-country  authorities  and 
facilitate the exchange of information on risks and exposures across jurisdictions. 

Certain  respondents  argued  that  the  powers  of  ESMA  could  be  extended  so  that  it 
becomes the main single direct supervisor in the area of the registration, supervision and 
resolution of CCPs. Other respondents noted that, considering the current situation where 
market activity is focused in particular countries (like the United Kingdom), a common 
supervisor especially after the United Kingdom exits the EU would be needed to ensure 
higher standards for investor protection and market integrity. 

Nevertheless,  when  considering  the  extension  of  ESMA's  direct  supervisory  powers, 
many  respondents  highlighted  the  need  to  respect  the  principles  of  subsidiarity  and 
proportionality.  

First,  a  few  of  the  respondents  that  generally  approved  the  extension  of  ESMA's 
supervisory powers argued that the current regime of colleges of supervisors is working 

157   See Section C on 'Direct supervisory powers in certain segments of capital markets' in the consultation 

document: 
https://ec.europa.eu/info/sites/info/files/2017-esas-operations-consultation-document_en.pdf   

92 

 
                                                 
well  and  should  be  maintained  as  one  mechanism  to  supervise  CCPs.  In  particular, 
respondents highlighted that NCAs should still be actively involved in the supervision of 
CCPs, notably given the various types of CCPs that currently operate in the EU (local vs. 
cross-border).  One  respondent  also  highlighted  the  need  for  NCAs  to  be  sufficiently 
involved in the supervision of CCPs active in their territories, mainly for the reasons of 
protection of retail clients, financial stability and insufficient funding of ESMA. On this 
basis, a few respondents suggested enhancing ESMA's powers within the colleges as an 
alternative  (or  parallel)  option  to  extending  ESMA's  direct  supervisory  powers,  for 
instance by granting ESMA the right to vote in the college, to exercise binding mediation 
in case no consensus is reached, or to have the final say in decision-making. A number of 
respondents also suggested that ESMA should be granted chairmanship of the colleges to 
ensure  the  preservation  of  EU  interests  in  all  circumstances  and  facilitate  supervisory 
convergence. 

Second,  several  respondents  underlined  the  risk  of  overlapping  supervision  between 
ESMA and NCAs, as the latter would remain involved in supervision to a certain extent, 
which  could  lead  to  inefficiencies.  Respondents  outlined  the  need  that  more  effective 
collaboration  between  NCAs  and  ESMA  should  be  envisaged  to  avoid  overlapping 
supervision. 

Third,  certain  respondents  suggested  that  only  entities  with  a  pan-European  dimension 
should  be  cover  in  case  the  supervisory  powers  of  ESMA  were  to  be  extended.  For 
instance,  a  respondent  called  for  an  assessment  of  how  ESMA's  direct  supervision  of 
systemic  CCPs  would  work  in  practice,  taking  into  account  the  following  factors  in 
deciding whether there should be a further transfer of supervisory responsibilities to the 
pan-European level: 

- 

- 

- 

the value of supervision conducted at national level by authorities that are closest 
to  the  market  where  the  CCP  is  located  and  where  there  is  already  strong 
coordination between regulators through supervisory colleges; 
the role of resolution authorities in the context of the Commission's proposal on a 
framework for CCP recovery and resolution;  
the need for coordination between supervisors (i.e. financial markets regulators) 
and prudential/resolution authorities for systemic market infrastructures. 

A  smaller  number  of  respondents,  including  mainly  public  authorities  but  also  private 
individuals  and  industry  associations,  were  not  in  favour  of  extending  the  supervisory 
powers  of  ESMA  over  CCPs.  The  main  arguments  put  forward  included  the  fact  that 
ESMA would lack financial resources to cater for a failing CCP, no matter how limited 
the  risk  of  such  an  event  is,  and  the  fact  that  CCPs  pose  a  systemic  risk  within  their 
Member  State  of  establishment,  which  is  why  supervision  should  be  kept  at  a  national 
level. 

3.2. CCP-related responses regarding relations with third countries 

A  number  of  respondents  indicated  that  a  cautious  approach  should  be  maintained 
regarding direct supervision by ESMA of third-country CCPs that are recognised in the 
EU or of location requirements, arguing that such an approach would run contrary to the 
global trend of a system of equivalence through recognition of comparable rules. Direct 
ESMA supervision of third-country CCPs might lead to an escalation of extra-territorial 
regulatory  standards  by  jurisdictions  around  the  world,  contradicting  the  principle  of 
mutual  recognition  and  limiting  liquidity  and  risk  management  tools  for  EU-based 
market participants wishing to access global liquidity pools. 

93 

 
By  contrast,  another  respondent  indicated  that  the  centralisation  of  relationships  with 
third  countries  at  the  regional  level  through  the  ESAs  is  appropriate  and  the  most 
efficient way to gain uniformity in the implementation of equivalence decisions. 

4.  Stakeholder consultation in the framework of the CMU mid-term review 

The  Commission  carried  out  a  public  consultation  as  part  the  CMU  mid-term  review, 
which was open from 20 January 2017 to 17 March 2017158. The consultation sought the 
views  of  stakeholders  on  how  the  current  CMU  programme  can  be  updated  and 
completed so that it represents a strong policy framework for the development of capital 
markets. The consultation generated 178 responses. 

The  Commission  had  not  published  a  summary  of  responses  to  this  consultation  at  the 
time of finalisation of this impact assessment. However, this section provides a general 
overview of relevant comments related to supervisory convergence. 

Many  respondents  commented  on  the  need  for  greater  regulatory  harmonisation  and 
convergence to overcome real and perceived cross-border barriers, although only a few 
respondents  provided  specific  input  on  supervisory  practices  and  convergence.  Those 
respondents  that  provided  input  emphasised  the  importance  of  strengthening  and 
improving supervisory convergence for the development of the CMU, in particular for 
stimulating  the  provision  of  cross-border  services,  increasing  cross-border  investment, 
securing a level-playing field and ensuring investor protection and confidence.  

Respondents  from  a  wide  range  of  stakeholder  groups  favoured  strengthening  the 
mandates  of  the  ESAs  to increase supervisory  convergence.  In this  context, particular 
focus  was  put  on  ESMA,  with  industry  in  particular  supporting  more  centralisation  of 
supervisory powers within ESMA leading to the eventual creation of a single supervisor 
for capital markets. 

A few respondents highlighted specific areas where a strengthening of the mandate of the 
ESAs would be desirable. These include strengthened powers to: (i) monitor supervisory 
regimes and make public any gaps encountered; (ii) enforce non-binding regulation; (iii) 
adjust  the  implementation  of  a  rule  through  mechanisms  such  as  no-action  letters;  and 
(iv)  evaluate  the  interplay  of  the  ESAs  with  national  supervisors  to  eliminate 
redundancies in reporting and help align national standards. 

158   The consultation can be found at: https://ec.europa.eu/info/finance-consultations-2017-cmu-mid-term-

review_en  

94 

 
 
 
 
                                                 
ANNEX 5: WHO IS AFFECTED BY THE INITIATIVE AND HOW? 

CCPs  will benefit  from  a  streamlined  supervision  mechanism  providing  legal  certainty 
and  efficient,  rapid,  decision-making  capacities.  In  particular  when  reviewing  their  risk 
models and expanding the scope of their business activities, CCPs will get a better view 
as to what is expected from authorities responsible for their supervision as well as more 
clarity on the timeline for authorisation. CCPs will additionally benefit from the impact 
on  financial  stability  this  initiative  could  have.  Stronger  and  streamlined  supervision 
make  the  probability  of  failure  of  a  CCP  even  more  remote  than  it  already  is  and  the 
contagion  of  such  a  failure  to  other  CCPs  highly  unlikely.  CCPs  might  have  to  face 
supervisory  fees  which  could  either  impact  their  annual  turnover  or  be  passed  on  to 
clearing members. 

Clearing members and their clients (clearing counterparties) will benefit from safer 
CCPs  supervised  under  a  proportionate  approach.  The  impact  of  this  initiative  with 
regard to the business conducted by clearing counterparties with CCPs established in the 
EU is expected to be minimal and certainly seamless from an operational standpoint. As 
mentioned above, as supervisory fees might be required from CCPs, some of these fees 
could  be  passed  on  by  CCPs  to  their  clearing  counterparties.  This  financial  effect  is, 
however,  expected  to  be  very  limited  compared  to  volume  of  financial  instruments 
cleared and to be cleared. 

Depending  on  the  intensity  of  supervision  applied  to  third-country  CCPs  and  should  a 
location  policy  be  required  for  certain  third-country  CCPs,  there  could  be  higher 
financial costs and operational impacts on clearing counterparties. The introduction of a 
location policy could lead to heavy repapering of existing contracts (both between third-
country  CCPs  and  clearing  members  and  between  clearing  members  and  their  clients), 
potential higher costs of trading due to market fragmentation and impacts on the liquidity 
of the instruments cleared and potential higher costs of clearing due to losses in margin 
efficiencies. In order to keep these costs to a minimum, the location policy would have to 
be introduced in a proportionate and progressive manner so as to protect the interests of 
clearing counterparties. 

EU  institutions,  ESMA  and  National  Competent  Authorities  will  be  the  most 
impacted  by  the  initiative  as  their  tasks  and  responsibilities  will  evolve.  This  is  true  in 
particular  for  ESMA,  the  ECB  and  Central  Banks  of  Issue  in  the  EU  for  which  more 
supervisory powers are envisaged and therefore for which more human resources will be 
needed. While there could be some rebalancing between institutions, the initiative creates 
additional supervisory tasks, specifically with regard to third-country CCPs for which a 
net need of additional resources will be required. 

The general public and taxpayers will benefit from a safer financial system where the 
probability  of  the  failure  of  a  CCP  and  the  contagion  of  such  an  event  to  the  broader 
financial system is reduced to an even lower figure than today. 

95 

 
 
 
ANNEX 6: ANALYSIS OF THE CURRENT FUNCTIONING OF SUPERVISORY COLLEGES  

This  Annex  provides  an  analysis  of  the  current  functioning  of  the  supervisory  colleges 
established  under  Article  18  of  EMIR 159,  with  a  focus  on  the  role  of  the  European 
Securities  and  Markets  Authority  (ESMA),  of  the  National  Competent  Authorities 
(NCAs)  and  of  the  other  college  members  in  the  decision-making  procedures  for  the 
authorisation and the ongoing supervision of Central Counterparties (CCPs) established 
in  the  EU.  This  Annex  also  considers  the  possible  further  development  of  European 
cooperation  with  regard  to  the  authorisation  and  the  ongoing  supervision  of  CCPs 
established in the EU. It is based on ESMA's 2015160 and 2016161 peer review reports and 
ESMA's EMIR Review Report no.4162. 

"However,  ESMA  also  sees  a  risk  that  following  authorisation 
CCP  colleges  may  become  simply  a  mechanism  for  the  exchange 
of  information,  rather  than  an  effective  supervisory  tool.  In 
addition to continuing to identify and challenge issues of attention 
or of concern in order to strengthen the CCP’s level of compliance 
with  the  EMIR  framework,  ESMA  considers  that  more  active 
involvement in the supervisory process would be desirable." 
ESMA, 2015 

1.  EMIR requirements and national supervision of CCPs supported by ESMA and 

a supervisory college 

While  EMIR  provides  for  uniform  requirements  for  the  performance  of  activities  of 
CCPs 163 ,  the  primary  responsibility  for  the  authorisation  and  supervision  of  these 
financial market infrastructures remains at national level. Each Member State designates 
one  or  more  competent  authority/authorities  responsible  for  the  authorisation  and 
supervision  of  CCPs  established  in  its  territory164.  These  NCAs  are  responsible  for  the 
authorisation  (including  its  extension  and  withdrawal)  as  well  as  for  the  ongoing 
supervision of  the  CCPs.  They  establish,  manage  and  chair the  supervisory  colleges165. 
The college consists of: (a) ESMA; (b) the CCP’s competent authority; (c) the competent 
authorities responsible for the supervision of the clearing members of the CCP that are 
established in the three Member States with the largest contributions to the default fund 
of  the  CCP  referred  to  in  Article  42  of  EMIR  on  an  aggregate  basis  over  a  one-year 
period;  (d) the  competent  authorities  responsible  for  the  supervision  of  trading  venues 
served  by  the  CCP;  (e) the  competent  authorities  supervising  CCPs  with  which 

159   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,  OJ  L  201  27.7.2012,  p.  1).  A  consolidated 
version is available at: 
http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:02012R0648-20170401&rid=1  

160   ESMA review of CCP colleges under EMIR, January 2015 

 https://www.esma.europa.eu/sites/default/files/library/2015/11/2015-20-
_report_on_esma_review_of_ccp_colleges.pdf  

161   ESMA,  Peer  Review  under  EMIR  Art.  21  Supervisory  activities  on  CCPs’  Margin  and  Collateral 

requirements, 22 December 2016, ESMA/2016/1683 (ESMA peer review 2016) 
https://www.esma.europa.eu/sites/default/files/library/2016-1683_ccp_peer_review_report.pdf  

162   ESMA, EMIR review report no. 4, ESMA input as part of the Commission consultation on the EMIR 

Review, 13 August 2015, ESMA/2015/1254 
https://www.esma.europa.eu/sites/default/files/library/2015/11/esma-2015-1254_-
_emir_review_report_no.4_on_other_issues.pdf    

163   Article 1, paragraph 1of EMIR. 
164   Article 22, paragraph 1 of EMIR. 
165   Article 18, paragraph 1 of EMIR. 

96 

 
 
 
 
 
 
                                                 
interoperability  arrangements  have  been  established;  (f) the  competent  authorities 
supervising  central  securities  depositories  to  which  the  CCP  is  linked;  (g) the  relevant 
members of the European System of Central Banks (ESCB) responsible for the oversight 
of the CCP and the relevant members of the ESCB responsible for the oversight of the 
CCPs with which interoperability arrangements have been established; and (h) the central 
banks  of  issue  of  the  most  relevant  Union  currencies  of  the  financial  instruments 
cleared.166 While  ESMA  has  no  voting  right167,  all  other  authorities  represented  in  the 
college are - in principle - voting members. Nevertheless, only up to three authorities per 
Member State are entitled to vote in colleges with more than 12 members.168 Therefore, 
all college members including the NCA and the central banks of issue referred to in point 
(h) of Article 18(2) of EMIR are (only) college members that can be outvoted when the 
college takes a majority decision. 

Other than for CCPs established in the EU, EMIR does not require the establishment of a 
supervisory  college  for  CCPs  established  in  third  countries,  which  are  recognised  by 
ESMA to provide clearing services to clearing members or trading venues established in 
the EU. 

2.  Co-decision competences of the college and of ESMA for special decisions 

EMIR grants the supervisory colleges and ESMA with certain co-decision competences. 
The  college's  co-decision  competences  are  strong  with  regard  to  the  authorisation  of  a 
CCP 169 ,  the  extension  of  that  authorisation 170  and  the  approval  of  interoperability 
arrangements 171 .  In  these  cases,  the  decision-making  procedure  under  Article  17  of 
EMIR  applies.  Under  that  procedure,  the  NCA  cannot  grant  the  authorisation  or  the 
approval where all the members of the college, excluding the authorities of the Member 
State where the CCP is established, reach a joint opinion by mutual agreement that the 
CCP shall not be authorised or the interoperability arrangement shall not be approved.172 
Where  a  majority  of  two-thirds  of  the  college  have  expressed  a  negative  opinion,  any 
NCA  that  is  part  of  that  majority  can  refer  the  matter  to  ESMA  for  binding  mediation 
under  Article  19  of  the  ESMA  Regulation.173 The  same  is  possible  for  the  NCA  all 
members of the college, excluding the authorities of the Member State where the CCP is 
established,  reach  a  joint  opinion  not  to  authorise  the  CCP  or  not  to  approve  the 
interoperability arrangement.174 

In cases of the validation of a significant change to the models and parameters adopted to 
calculate  a  CCP's  margin  requirements,  default  fund  contributions,  collateral 
requirements  and  other  risk  control  mechanisms175,  the  role  of  the  college  is  weaker. 
While Article 49 of EMIR requires an opinion of the college, it refers only to the voting 
rights  set  out  in  Article  19  of  EMIR  and  not  to  the  decision  making  procedure  of  its 
Article 17 of EMIR176.  By contrast, the  role of  ESMA is stronger: Article 49 of  EMIR 
does not only require a NCA validation of the proposed significant change of models or 

166   Article 18, paragraph 2 of EMIR. 
167   Article 19, paragraph 3, sentence 3 of EMIR. 
168   Article 19, paragraph 3, sentence 2 of EMIR. 
169   Article 14 of EMIR. 
170   Article 15 of EMIR. 
171   Article 54 of EMIR. 
172   Article 17, paragraph 4, subparagraph 3 of EMIR. 
173   Article 17, paragraph 4, subparagraph 4 of EMIR. 
174   Article 17, paragraph 4, subparagraph 6 of EMIR. 
175   Article 49 of EMIR. 
176   Article 49, paragraph 1, subparagraph 2 of EMIR. 

97 

 
 
 
                                                 
parameters,  but  in  addition  a  validation  of  ESMA,  which  is  independent  of  that  of  the 
NCA.  Thus,  ESMA  and  the  NCA  are  equally  ranking  with  regard  to  model  and 
parameter validations under Article 49 of EMIR.  

The college as a mechanism for the exchange of information 

In other cases, the college is not asked for an opinion. Its members are consulted177, can 
request  the  NCA  to  take  action178 or  are  just  informed  about  the  NCA's  decisions  and 
actions 179 .  In  practice,  the  NCAs  inform  the  members  of  the  college  more  or  less 
extensively  about  their  supervisory  activities  and  all  developments  relevant  for  a  CCP. 
The NCAs ask the other relevant authorities for information they need to perform their 
supervisory tasks. The written agreements under Article 18(5) of EMIR180 together with 
EMIR itself provide the legal basis for this exchange of information. 

ESMA's activities to enhance supervisory convergence 

Pursuant to point  (a) of Article 18(2) of  EMIR,  ESMA is the only  member of  all CCP 
supervisory  colleges  under  EMIR.181 Although  it  is  non-voting,  ESMA  plays  an  active 
role in facilitating the work of the colleges in line with the various tasks mandated under 
EMIR. To foster supervisory convergence, it: 

- 

- 

- 

issues  guidelines  and  recommendations  e.g.  for  establishing  consistent,  efficient 
and  effective  assessments  of  interoperability  arrangements  under  Article  54  of 
EMIR or on standard written agreement for the establishment and functioning of 
CCP colleges; 

issues opinion e.g. on voting procedures for CCP colleges or portfolio margining 
within CCPs; 

issues and updates Questions & Answers on the implementation of EMIR; 

-  provides standard templates e.g. for the college members' questions on the CCP's 
application for authorisation and the NCA's answers to these questions or for the 
NCA's risk assessment within the authorisation process; 

- 

initiates  and  coordinates  (on  an  annual  basis)  a  Union-wide  assessment  of  the 
resilience of CCPs to adverse markets developments ("stress test"); and 

-  validates significant changes to CCPs' risk models and parameters under Article 
49 of EMIR independently from, and in addition to, the NCA's own validation182. 

With the exception of the validation of significant changes to the CCPs' risk models and 
parameters, ESMA does not itself perform supervisory tasks, but adds to the supervisory 

177   Article 20, paragraph 2 of EMIR with regard to the withdrawal of authorisation. 
178   Article 20, paragraph 2 of EMIR with regard to the determination if the authorisation requirements are 

(still) fulfilled or the withdrawal of authorisation is necessary. 

179   Article  21,  paragraph  4  of  EMIR  with  regard  to  the  review  and  evaluation  outcomes;  Article  24  of 
EMIR  with  regard  to  emergency  situations;  Article  31,  paragraph  5  of  EMIR,  where  the  competent 
authority opposes a proposed acquisition of a CCP. 

CCP 

180   ESMA published Guidelines and  Recommendations regarding written  agreements  between  members 
ESMA/2013/661, 

of 
https://www.esma.europa.eu/sites/default/files/library/2015/11/2013-
661_report_gr_on_college_written_agreement_-_final_for_publication_20130604.pdf, which are used 
by all colleges. 

colleges, 

Report, 

2013, 

June 

4 

181   ESMA peer review 2015, p. 9, para. 9. 
182   ESMA peer review 2015, p. 9, para 10 and pp. 10/11, paras 13- 18. 

98 

 
 
 
 
 
 
                                                 
framework within which the NCAs and the other members of the college supervise the 
CCP and take decisions where ESMA has no voting rights.  

This may help ESMA to fulfill its coordination tasks such as facilitating the adoption of 
the joint opinion under Article 19(2) of EMIR and fulfilling a coordination role between 
NCAs  and  across  colleges  with  a  view  to  building  a  common  supervisory  culture  and 
consistent supervisory practices, ensuring uniform procedures and consistent approaches, 
and  strengthening  consistency  in  supervisory  outcomes,  pursuant  to  Article  21(6)  of 
EMIR  as  well  as  its  mediation  role.  But  it  leaves  ESMA  out  of  the  day-to-day 
supervision of CCPs. 

3.  Practical experiences 

In  practice,  the  supervisory  colleges  meet  in  person  mostly  once,  in  rare  cases  twice  a 
year  and  are  informed  by  the  NCA  about  both  its  supervisory  activities  since  the  last 
meeting and the  planned  supervisory  activities that it plans to perform. In addition, the 
members of the college are informed regularly (in most cases monthly or quarterly) about 
any  developments  regarding  the  CCP.  At  least  once  a  year,  the  composition  of  the 
college  is  reviewed  by  the  NCA.  The  college  membership  under  point  (c)  of  Article 
18(2) of EMIR183 tends to change often in colleges of CCPs where clearing members of 
more than three Member States are responsible for almost the same contributions to the 
default fund of the CCP referred to in Article 42 of EMIR. In such cases, the authorities 
that  become  college  members  and  those  that  do  not  depends  on  the  one-year-period 
chosen  to  determine  the  college  membership.  This  may  challenge  the  continuity  of  the 
college  work.  Therefore,  some  NCAs  have  -  with  the  prior  consent  of  all  college 
members under the written agreement - invited such former and potential future college 
members to participate in college meetings as observers. 

Most colleges worked most intensively on matters in which the college has co-decision 
competences.  Therefore,  the  authorisation  of  the  CCP  and,  where  these  took  place,  the 
extension  of  that  authorisation  and  model  validations  required  the  most  intensive  work 
within the colleges.184 Especially during the authorisation process, "ESMA observed that 
in  general  the  CCP  colleges  facilitated  two-way  cooperation:  on  the  one  hand,  the 
chairing NCAs received good and constructive input from the college members which fed 
into  their  risk  assessments;  while  on  the  other  hand,  college  members  received  the 
information they required in order to vote on the adoption of the joint opinion."185 Where 
there is no need of such an opinion, a smaller level of cooperation is needed. Thus, other 
matters such as the annual review of the activities of the CCP and its NCA did not spark 
an  equally  intense  cooperation.  Therefore,  ESMA  sees  a  "risk  that  following 
authorisation  CCP  colleges  may  become  simply  a  mechanism  for  the  exchange  of 
information,  rather  than  an  effective  supervisory  tool." 186  Where  no  opinion  of  the 
college  is  required,  the  college  members  do  not  have  to  take  and  justify  their  own 
decision. Thus, the colleges could evolve in the direction of information exchange tools 
rather  than  take  active  part  into  the  supervision  of  the  CCP  itself.  This  could  lead  to  a 

183   "the competent authorities responsible for the supervision of the clearing members of the CCP that are 
established in the three Member States with the largest contributions to the default fund of the CCP 
referred to in Article 42 of EMIR on an aggregate basis over a one-year period". 

184   No  CCP  entered  into  new  interoperability  arrangements  after  its  re-authorisation  under  EMIR.  The 
approval of such an interoperability arrangement would probably require the same amount of college 
involvement as the same procedure applies as for the authorisation of the CCP. 

185   ESMA peer review 2015, p. 16, para. 30. 
186   ESMA peer review 2015, p. 19, para. 38. 

99 

 
 
 
 
                                                 
decrease  of  the  influence  of  ESMA  and  the  other  college  on  the  supervision  of  CCPs 
established in the EU.  

ESMA  observed  some  heterogeneity  in  the  degree  to  which  different  college  members 
participated  in  college  discussions,  which  might  reflect  the  different  basis  for  college 
member participation in the college under Article 18 of EMIR with different parts of the 
college  work  in  which  they  have  a  special  interest.  Indeed,  supervisors  of  trading 
platforms served by the CCP have a different focus than supervisors of central securities 
depositories  (CSDs)  to  which  the  CCP  is  linked,  supervisors  of  the  CCP’s  clearing 
members,  or  supervisors  of  interoperating  CCPs.  Another  reason  might  be  that  the 
resources the college members can allocate to the college work differ from authority to 
authority.187 However, ESMA did observe that some college members relied heavily on 
other members to review the substantive parts of the CCP’s application while themselves 
focusing on a narrow set of issues. Overall, ESMA sees the cooperation in the colleges as 
sufficient,188 while certain improvement is required especially with regard to the question 
where an extension of the authorisation or a model validation is required.189  

In this regard, the approaches of the different NCA vary to a significant extent even in 
cases  involving  comparable  CCPs  although  these  decisions  require  -  because  of  their 
great  importance  for  the  CCP,  its  clearing  members  and  the  authorities involved  in the 
CCP's  supervision  -  the  highest  degree  of  involvement  and  the  strongest  co-decision 
competences  of  ESMA  and  the  supervisory  college.  This  weakness  of  the  current 
supervisory  structure  is  observed  in  each  ESMA  report  on  this  matter.  Even  common 
templates provided by ESMA to support the NCAs in their determination whether a risk 
model or parameter change is significant or a new product requires an extension of the 
CCP's  authorisation  did  not  solve  that  problem,  because  the  NCAs  exercise  their 
discretion differently in this cases. 

This  shows  the  main  weakness  of  the  current  supervisory  framework  for  CCPs 
established in the EU: ESMA can only influence CCP supervision through its regulatory, 
coordination  and  supervisory  convergence  role.  Within  that  role,  "ESMA  has  aimed  at 
promoting  a  common  supervisory  approach  in  the  implementation  of  EMIR,  by 
proposing common practices for colleges, developing a common practical application of 
EMIR provisions, and ensuring a consistent application of EMIR requirements for CCPs 
across  colleges.  In  doing  so,  ESMA  cooperated  with  NCAs,  leveraging  on  its  internal 
governance  structures,  namely  the  Post  Trading  Standing  Committee  (PTSC)  and 
ultimately  the  Board  of  Supervisors,  to  develop  and  agree  common  policy  views,  the 
legal  instruments  (RTS,  Guidelines  and  Recommendations,  Opinion)  and  other  tools 
(Q&As  and  best  practices)  aiming  at  promoting  a  common  supervisory  approach,  as 
further presented below."190  

In  other  words,  ESMA  has  sought  to  convince  the  NCAs  and  other  members  of  the 
college to adopt a common supervisory approach using the means of a standard-setting 
body  and  its  participation  in  the  colleges,  but  did  not  take  part  in  the  day-to-day 

187   ESMA peer review 2015, p. 16, para. 32. 
188   ESMA peer review 2015, p. 20, para. 41. 
189   ESMA peer review 2015, p. 20, para. 42; ESMA, EMIR Review Report no. 4, p. 22, para. 133; ESMA 
peer  review  2016,  p.  7,  paras.  21  -  23,  with  regard  to  the  possible  necessity  of  an  extension  of 
authorisation under Article 15 of EMIR, and p. 8, paras. 24 - 27, with regard to the possible necessity 
of a model validation. 

190   ESMA peer review 2015, p. 10, para. 11. 

100 

 
 
 
 
 
                                                 
supervision  of  CCPs  itself.  Because  ESMA  promotes  supervisory  convergence  almost 
only with means of standard setting, it is insufficiently involved in CCP supervision.  

The exceptional case of the validation of risk models and parameters under Article 49 of 
EMIR  shows  how  ESMA's  supervisory  convergence  role  and  CCP  supervision  as  such 
could  be  strengthened.  In  that  case,  ESMA  has  its  own  supervisory  competences 
independent of those of the NCA and the college. This equips ESMA with a much bigger 
power  to  promote  supervisory  convergence.  In  addition,  ESMA  can  bring  something 
which only it can provide, namely its horizontal view. ESMA, being member of all CCP 
supervisory  colleges,  knows  not  only  every  CCP  but  also  how  every  single  model  or 
parameter  validation  has  been  dealt  with.  Thus,  ESMA  can  provide  supervisory 
convergence  not  only  by  providing  standards,  but  also  by  providing  a  convergent 
supervisory practice itself. The only remaining challenge is that the approaches of NCAs 
continue  to  differ  regarding  how  to  determine  which  model  or  parameter  change  is 
significant. 

4.  Conclusion 

ESMA's  supervisory  role  should  be  strengthened  taking  Article  49  of  EMIR  as  an 
example.  ESMA  should  have  a  voting  right  in  the  colleges  and  further  co-decision 
competences.  This  would  lead  to  a  "more  active  involvement  in  the  supervisory 
process"191 as a whole. ESMA could be involved in the whole supervisory process in the 
same way that it is already involved in the validation of significant model changes under 
Article 49 of EMIR.  This  would allow a  more horizontal  approach to CCP  supervision 
throughout  the  EU,  taking  into  account  developments  in  every  CCP.  This  can  only  be 
done  by  an  EU  institution  that  takes  part  in  the  day-to-day  supervisory  process  itself 
rather than trying to reach a more common supervisory approach via the colleges. 

This leads to the question whether the colleges would still be needed if ESMA's role in 
the supervisory process and therefore its European component would be strengthened in 
this  way.  The  colleges  in  their  current  structure  have  the  advantage  that  views  of 
supervisors  of  different  actors  involved  in  central  clearing  are  represented.  A  stronger 
supervisory  role  of  ESMA  would  not  change  the  need  for  the  involvement  of  these 
authorities  in  the  colleges.  Whoever  supervises  a  CCP  needs  the  input  of  college 
members  and  those  members  need  the  information  that  their  college  participation 
provides them with for their own supervisory tasks.  

The role of the college could be strengthened by referring to its co-decision competences 
as  defined  in  Article  17  of  EMIR  in  additional  cases  and  clarifying  the  legal 
consequences and effects of its opinion referred to in the second subparagraph of Article 
49(1) of EMIR. But it may be too early to do so as the re-authorisation under EMIR is 
still  outstanding  for  one  CCP192.  Another  CCP193 has  just  been  re-authorised  lately.194 
Therefore, further experience with regard to the functioning of the colleges after the re-
authorisation of the CCPs is necessary to determine in which decisions the college should 
be more involved. 

191 ESMA peer review 2015, p. 19, para. 38. 
192 SKDD-CCP Smart Clear d.d. established in Croatia. 
193   ICE Clear Europe Limited in the United Kingdom. 
194   See the list of CCPs authorised in the European Union at: 

https://www.esma.europa.eu/sites/default/files/library/ccps_authorised_under_emir.pdf.  

101