EUROPEAN UNION: European Commission Publishes Questions and Answers on the Proposal to Amend the European Market Infrastructure Regulation (EMIR)

What is EMIR and why is the Commission proposing to amend it?

The European Market Infrastructure Regulation (EMIR) is a centrepiece of the legislation introduced in the wake of the financial crisis to make financial markets safer and more transparent.

The Commission has carried out an extensive assessment of EMIR to ensure that EU legislation is working effectively and efficiently and has targeted amendments to the supervisory regime for EU and third country CCPs.

What has EMIR achieved so far in relation to CCPs?

Since the adoption of EMIR in 2012, the volume of CCP activity – both in the EU and globally – has grown rapidly in scale and scope. The share of OTC interest rate derivatives that are centrally cleared has risen from about 36% at the end of 2009 to 60% by the end of 2015 (for more information see here). The rapidly expanding role of CCPs in the global financial system reflects the introduction of central clearing obligations across different asset classes in the EU (since June 2016) and non-EU countries. Growing awareness of the benefits of central clearing among market participants has also increased voluntary use. The targeted amendments proposed in May 2017 to improve the effectiveness and proportionality of EMIR will reinforce this trend, by creating further incentives for CCPs to offer central clearing of derivatives to market participants.

What led the Commission to make this proposal?

The Commission is making its proposal based on feedback that builds on an extensive assessment of EMIR and two public consultations: one on the operations of the European Supervisory Authorities (ESAs), another on the Capital Markets Union Mid-Term Review. We have also taken into account input received on our Communication responding to challenges for critical financial market infrastructures and to our Staff Working Document on equivalence.

Who will benefit from these changes?

The main beneficiaries of this proposal are citizens and the economy as a whole through a safer financial system where the probability of the failure of a CCP and the contagion to the broader financial system is further reduced. In addition, CCPs operating in the EU will benefit from a more streamlined European supervision process offering greater legal clarity and more efficient decision-making capacities.

What are the main proposed changes to EMIR for EU CCPs?

For CCPs established in the EU, national authorities will exercise supervision in agreement with the European Securities and Markets Authority (ESMA). For these purposes, it is proposed to set up a new CCP Executive Session within ESMA.

The existing colleges of national supervisors established under EMIR for each EU CCP will continue to act as bodies fostering cooperation and taking joint decisions, as they include all authorities who may be concerned by the activities of the CCP, for example the authorities responsible for trading venues and Central Securities Depositories. The Head of the new CCP Executive Session will chair the existing EMIR colleges in order to ensure consistency between the work of the Executive Session and that of the colleges.

How will the new CCP Executive Session in ESMA work?
The proposal would establish a new CCP Executive Session in the European Securities and Markets Authority (ESMA). This Executive Session will be responsible for all matters relating to CCPs within ESMA, including ESMA’s new supervisory powers for EU CCPs and third-country CCPs. The CCP Executive Session will consist of several permanent newly- appointed independent members, along with the relevant national authorities responsible for the CCP concerned and with the relevant central bank(s) of issue and the Commission as non-voting members.

What will the role of the European Central Bank be?

The role of the ECB is reinforced in the supervisory system through its permanent membership in the CCP Executive Session and in the supervisory colleges. For specific decisions directly related to their role and responsibilities, the ECB and the relevant central banks of issue will be given binding decision powers in the Executive Session.

Safe and efficient financial market infrastructures, in particular clearing systems, are essential for the transmission of monetary policy, a basic task to be carried out through the European System of Central Banks (ESCB) supporting the primary objective of maintaining price stability. The relevant members of the ESCB, as central banks of issue of the currencies of the financial instruments cleared by CCPs, should be involved in CCP supervision, due to the potential risks that the malfunctioning of a CCP could pose to the pursuit of those basic tasks and the primary objective, affecting the instruments and counterparties which are used to transmit monetary policy. As a result, the central banks of issue should be involved in the assessment of a CCP’s risk management.

What additional requirements will systemically important CCPs be subject to?

Before being recognised by ESMA and being able to do business in the EU, a systemically important CCP will have to comply with several additional requirements. First, it should comply with the necessary prudential requirements for EU-CCPs (e.g. capital requirements, conduct of business rules, margin, etc.). Second, it should comply with any additional requirements set by the relevant EU-central banks (e.g. the availability or type of collateral held in a CCP, segregation requirements, liquidity arrangements, etc.). Third, it should give its agreement to provide ESMA with all relevant information and to enable on-site inspections, as well as a legal opinion confirming that such arrangements are valid in the third country. Fourth, CCPs should have all necessary measures and procedures in place to be able to comply with the first and third conditions.

In order to ensure proportionality in these requirements, a system of ‘comparable compliance’ similar to that in the US is introduced. This will enable CCPs to ask ESMA to compare EMIR’s requirements with those of the third country. If the rules in a third country are deemed comparable to those in EMIR, ESMA may determine that the application of that country’s rules is comparable to compliance with EMIR.

Will this result in market fragmentation?

The proposal features proportionate arrangements that strike the right balance between safeguarding financial stability and making sure the impact on markets is limited to the best extent possible.

The Commission remains committed to the system of equivalence. In order to avoid market fragmentation to the largest extent possible, specific arrangements based on objective criteria will be considered only for CCPs that play a key systemic role for EU financial markets and only where necessary.

The Commission expects supervisory authorities to remain vigilant as to the potential consequences for end users and the market in general, after the legislative proposal comes into force. We will strive to ensure that the implementation takes place as smoothly and seamlessly as possible.

What impact will existing equivalence decisions with non-EU jurisdictions have?

Regular reviews of all equivalence decisions have always been an integral part of the EU’s equivalence framework all along. Unless there are regulatory or supervisory changes in the third-country or changed market circumstances, the proposal does not put into question the existing equivalence decisions adopted so far by the Commission.

In particular, the equivalence agreement with the US was hailed at its adoption as a major achievement in transatlantic cooperation and remains an important agreement in our bilateral cooperation. To date, the deal has proven fit for purpose, facilitating high-standard transatlantic OTC activities, while not putting financial stability at risk.

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