The European Market Infrastructure Regulation (EMIR) review proposals are the culmination of the work that the European Commission (Commission) carried out in 2015 and 2016 which included a public consultation and a general report on the Regulation. The first set of amendments were published by the Commission in May 2017 and set out changes in the areas of reporting requirements, non-financial counterparties, financial counterparties and pension funds. The second set of proposals were published in June 2017 and set out changes as to how EU and third country CCPs are supervised.
The Commission’s rationale for the second set of proposals was summed up by Valdis Dombrovskis, Vice President responsible for Financial Stability, Financial Services and Capital Markets Union, stating, “The continued safety and stability of our financial system remains a key priority. As we face the departure of the largest EU financial centre, we need to make certain adjustments to our rules to ensure that our efforts remain on track.”
The second set of EMIR review proposals, which take the form of a draft Regulation, would grant ESMA significant new powers in respect of third country CCPs and EU CCPs.
For CCPs established in the EU, Member State supervisors will exercise supervision in agreement with ESMA. Critically, a new CCP Executive Session within ESMA will be established for these purposes. Existing colleges of national supervisors established under EMIR for each EU CCP will continue to act as bodies fostering cooperation. However, the head of a new CCP Executive Session will chair the existing EMIR colleges. The CCP Executive Session will be established within ESMA. The CCP Executive Session will consist of several permanent newly-appointed independent members, together with the relevant Member State supervisors responsible for the CCP concerned and the relevant central bank(s) of issue and the Commission as a non-voting member. The CCP Executive Session will make decisions by a simple majority of its members, and its head is to have a casting vote in case of a tie.
As is currently the case the Commission will determine the equivalence of third-country CCPs. However, a two tier system for third country CCPs will be introduced:
- non-systemically important CCPs will be known as ‘Tier 1 CCPs’ and will continue to operate under the existing EMIR equivalence framework; and
- systemically important CCPs will be known as ‘Tier 2 CCPs’ and be subject to stricter requirements.
CCPs that have already been recognised under the current EMIR regime will continue to be recognised as Tier 1 CCPs until ESMA has determined that they are a Tier 2 CCP. ESMA will decide if a third country CCP is a Tier 2 CCP by assessing a number of aspects of the third-country’s CCP’s business. The determination will be based on four criteria:
- the nature, size and complexity of the third-country CCP’s business;
- the effect that the failure of, or a disruption to, the third-country CCP would have on the financial stability of the EU;
- the third-country CCP’s clearing membership structure; and
- the third-country CCP’s relationship, interdependencies, or other interactions with other financial market infrastructures.
However, at the moment the above criteria have no quantitative thresholds or metrics. The Commission, in cooperation with ESMA and the European System of Central Banks, will specify the exact criteria in a Delegated Act which is planned to be adopted within six months of the entry into force of the draft Regulation.
Furthermore there are four additional requirements that Tier 2 CCPs must fulfil:
- on-going compliance with the relevant and necessary prudential requirements for EU-CCPs as set out in Article 16 and in Titles IV and V of EMIR;
- written confirmation – within 180 days – from the relevant EU central bank of issue that the third-country CCP complies with any requirements imposed by that central bank. Such requirements could be imposed by the central bank in the exercise of its monetary policy tasks and may concern the availability and specific type of collateral held within a CCP;
- there must be written consent by the third-country CCP that ESMA may access its business premises on request and access any information held by it; and
- the third-country CCP must have all necessary procedures and measures in place to be able to comply with the first and third condition above.
The proposals further provide that cooperation arrangements between ESMA and third-country supervisors must be effective in practice and include the third-country supervisors’ agreement to allow investigations and on-site inspections and specify the procedures necessary for the effective monitoring of regulatory and supervisory developments in the third country. Arguably, Tier 2 CCPs will be co-supervised by their third-country home supervisor and ESMA.
The Commission’s proposals also introduce a further category of third country CCP, the ‘substantially systemically important CCP’. A third country CCP will have this designation if it is of such systemic importance for the EU or one or more of its Member States that the additional requirements for Tier 2 CCPs are insufficient to mitigate the potential risks to EU financial stability.
ESMA has an important role to play in this designation. ESMA, in agreement with the relevant central bank, will make a recommendation to the Commission as to whether a CCP is of substantial systemic importance. Where a Commission adopts an implementing act declaring that the CCP is substantially systemically important it will have to establish itself in the EU and apply for authorisation in a Member State in accordance with the requirements set out in EMIR.
ESMA is to regularly review the recognition of third-country CCPs as well as their classification. Such reviews are to take place every two years and more frequently where necessary. ESMA is also given powers to fine a third-country CCP for any infringements of the draft Regulation whether or not they are intentional. Where a Tier 2 CCP has committed an infringement, either intentionally or unintentionally, ESMA can apply a range of enforcement measures including withdrawing the third-country CCP’s recognition.
The EMIR review proposals are now in trialogue, being scrutinised by the European Parliament and the Council of the EU. At the time of writing it was reported in the press that some of the Commission’s proposals were being toned down but only time will tell as to what the draft Regulation will eventually look like. As for timing, it is generally expected that the proposals will take effect before the end of 2019 although this depends on how the negotiations go.