Clearing interoperability in Europe's equities markets now seems likely to be enshrined in the European market infrastructure regulation (EMIR), but the new framework may not be signed off during the Hungarian presidency of the Council of the European Union, which closes at the end of June.
EMIR is being introduced by the European Commission to provide guidelines for central clearing and risk mitigation of OTC derivatives, requirements for central counterparties (CCPs), post-trade interoperability, reporting obligations and requirements for trade repositories.
Earlier this year, amends to the new regulatory framework had threatened to derail the interoperability agreements put together by four pan-European CCPs and submitted in mid-2010 for review by Dutch, UK and Swiss regulators.
In his initial report to the economics and monetary affairs committee (ECON) of the European Parliament, German MEP Werner Langen, rapporteur for EMIR, proposed that post-trade interoperability in the equities and derivatives markets be postponed until 2014 at the earliest.
Clearing competition cleared
But a compromise paper produced by Langen, which will be voted on next week by ECON, allows interoperability agreements between cash equity CCPs, under supervision by their competent authority. By 30 June 2012, Langen proposes, the European Securities and Market Authority (ESMA) will issue guidelines or recommendations with a view to establishing consistent, efficient and effective assessments of interoperability arrangements.
If the arrangements are given the green light, CCPs should be able to begin competing for business based on price, driving down the costs of clearing. While MiFID introduced competition between trading venues, trading members in Europe must use the CCP nominated by an exchange or multilateral trading
facility, rather than choosing their own preferred clearing provider.
“We have a blessing from [UK regulator] the Financial Services Authority (FSA) that our arrangements are satisfactory in principle,” said Diana Chan, CEO at EuroCCP. “We expect to go live in Q2, once all of the other parties, including the platforms, are ready. The regulators of CCPs are satisfied in principle, which means the design we have agreed is acceptable for the purposes of risk management. We expect to be announcing good news to the market from now on,” she added.
EuroCCP is expected to announce interoperability with Swiss CCP x-clear first, with further arrangements made on a platform-by-platform basis. Anglo-French CCP LCH.Clearnet has confirmed that a longstanding arrangement it holds with x-clear has been approved by the FSA.
ECON will vote on the amended EMIR text on 24 May, followed by a plenary vote of the Parliament in June. But there are serious doubts as to whether the Council will be able to agree the legislation before October. Even then, the Parliament and the Council must enter a ”trialogue' with the EC to agree a text that reconciles amendments with the original text. In theory, EMIR must come into force in 2012 to meet the deadline set by the Group of 20 political leaders.
But the compromise text at present does not widen the scope of EMIR to include exchange-traded as well as OTC derivatives. According to Sharon Bowles MEP, chair of ECON, this means the directive could become less relevant as greater volumes of derivatives migrate onto exchange. “Exchange-traded derivatives are already cleared, but including them in EMIR would have brought other requirements in to play, such as transparency and openness,” she said. “But there are concerns from large exchanges like Deutsche Börse that these more open requirements might be a problem vis-Ã -vis their business model.”
As the document currently stands, a CCP that has been authorised to clear eligible OTC derivative contracts must accept clearing such contracts “on a transparent, fair and non-discriminatory basis”. If this were extended to include all derivatives then exchange-owned CCPs, such as Deutsche Börse's Eurex Clearing, would lose some of their value as part of an integrated operation.
Although she does not object to the vertically integrated exchange and clearing model, Bowles has argued that preventing external venues from getting access to a siloed clearing facility is anti-competitive.
States of disarray
At the Council level, five issues remain in dispute: pension fund exemption from EMIR; CCP access to central bank money; the scope of ESMA's powers; access to clearing facilities by execution venues; and eligibility of specific contracts for clearing. Most countries have not yet reached a firm position in these issues. But the UK and Germany are believed to be in favour of more powers for national regulators, while France supports a strong ESMA. The Dutch and Nordic governments are keen on exemptions for large pension funds exempted where possible.
If the Council is unable to vote through a version of EMIR in June, it would fall to the next holder of the rotating presidency – Poland – to achieve consensus.