The European Commission (EC) has announced a new proposal to make central clearing of derivatives in the European Union “more attractive”.
The proposal is part of the Commission’s efforts to develop the Capital Markets Union (CMU) and seeks to amend the European Market Infrastructure Regulation (EMIR).
The proposed measures, according to a press release from the EC, will make the EU clearing landscape more attractive, by enabling central counterparties (CCPs), which provide clearing services, “to expand their products quicker and easier, and by further incentivising EU market participants to clear and build liquidity at EU CCPs.”
The Commission aims to build a “safe and resilient” clearing system, by strengthening the EU supervisory framework for CCPs, for example by increasing the transparency of margin calls.
The EC’s press release referred to the “recent development in the energy markets caused by Russia’s aggression against Ukraine” as an event to draw lessons from in terms of the clearing of derivatives.
There was no mention of the liquidity crisis that took place in the UK at the end of September, when an unprecedented rise in interest rates triggered widespread margin calls on interest-rate swaps, exacerbating the fall in Gilt prices.
However, one of the core aims of the proposal is to “reduce excessive exposures of EU market participants to CCPs in third countries, particularly for derivatives identified as substantially systemic by the European Securities and Markets Authority (ESMA),” said the press release.
The proposal requires all relevant market participants to hold active accounts at EU CCPs for clearing at least a portion of certain systemic derivative contracts.
“This will improve the management of financial stability risks in the EU,” according to the Commission.
The legislative proposal amending EMIR aims to ease the process by which EU CCPs seek approval for new activities or services.
This will be achieved by standardising documents to be provided by CCPs in their applications and reducing the length of time to obtain approval to a few weeks.
An EC document outlining the proposed amendment to EMIR said: “These reforms will considerably shorten the time it takes CCPs to bring a product to market or make a substantial model change.”
EU CCPs are encouraged to make the most of potential opportunities offered by a new framework, including by broadening their product range to meet the demand of their clearing members and clients.”
In the amended version of EMIR, market participants will be able to “get a better understanding of their future potential liquidity needs when clearing centrally”, as the legislation will introduce a requirement to make margin models more transparent for all.
“EU CCPs already provide tools that simulate the behaviour of margin models. This information should however be passed on through the clearing chain, as the liquidity needs arising from margin calls do not stop at the level of the clearing member, who will therefore be required to clearly explain to their clients how margin calls work and provide simulations under different scenarios,” said the document.
Under EMIR, EU pension funds are currently exempt from the clearing of derivatives through CCPs, but the exemption will be lifted from 2023.
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