On 13 June, the European Commission took steps to make the supervision of central counterparties (CCPs) more robust, both in the EU and beyond. The proposal seeks to improve the supervisory arrangements for CCPs established in 2012 by the European Market Infrastructure Regulation (EMIR), which lays down rules on OTC derivatives, central counterparties and trade repositories. The proposed reforms introduce a more pan-European approach to the supervision of CCPs in the EU and from non-EU countries. They also ensure closer cooperation between supervisory authorities and central banks responsible for EU currencies.      

Systemically important

In the wake of the financial crisis, the EU adopted a raft of measures to make the European financial system safer. Now, more and more derivatives trades (a form of insurance for the financial sector and clients against financial risk) are cleared by a limited number of CCPs.  Some of these CCPs have become a systemically important part of the EU financial sector and their importance is growing. This is a positive development and shows a growing awareness of the benefits of central clearing among market participants. But the rapidly increasing scale and scope of derivatives clearing means that the current approach has to be enhanced to ensure a more consistent and robust supervision of CCPs for the continued safety and stability of the EU financial system.

In addition to this the withdrawal of the United Kingdom from the European Union will have  an impact on the regulation and supervision of clearing in Europe because a substantial volume of euro-denominated derivatives transactions are currently cleared by UK CCPs. Faced with the departure of its largest financial centre, Valdis Dombrovskis, Vice-President responsible for Financial Stability, Financial Services and Capital Markets Union said the EU needs to ''make certain adjustments to our rules to ensure that our efforts remain on track''.

According to the Commission's proposal, the current approach, which is based on significant powers being with the home authorities, will be revised and the role of the European Securities and Markets Authority (ESMA) will be significantly reinforced. This will be done by changing its governance and creating a new supervisory mechanism, called the CCP Executive Session. The role of the central banks that issue currency will also be reinforced in the supervisory system.

Under the proposed reforms, the supervision of CCPs established both within and outside the EU will be enhanced. The proposal introduces a new 'two-tier' system for offshore CCPs depending on their systemic importance for the EU-financial system. Not much will change in practice for non-systemically important CCPs. They will continue to operate under the current equivalence system, which enables the EU to recognise the regulatory and supervisory regime of a non-EU jurisdiction as equivalent to that of the EU. However, systemically important offshore CCPs will be subject to a form of 'dual supervision', by both their home authorities and EU authorities. This means that EMIR rules will apply, but in a proportionate way as the application of similar rules and requirements in a non-EU country will be taken into account. This approach is similar to that of other countries, in particular the United States.

Safeguarding financial stability

Within the group of systemically important CCPs, an offshore CCP may be deemed to be of such substantial systemic importance that requiring it to comply with EMIR rules may still be insufficient to mitigate the potential risks to the financial stability of the EU. In this case, and as a last resort, upon the recommendation of ESMA and the relevant central banks, the Commission may decide that that CCP will only be able to access the Single Market if it is authorised under EMIR and established in the EU.

There are currently 17 CCPs established in the EU. An additional 28 CCPs in non-EU countries have been recognised under EMIR's equivalence provisions, allowing them to offer their services in the EU. The proposal, which has been submitted to the European Parliament and the Council for adoption, is based on an assessment of the supervisory arrangements in place for CCPs, as well as on feedback from a series of public consultations.

Read more on the second set of amendments of the EMIR review