The law outlines procedures for mandating clearing for some
derivatives, and how central counterparty clearing houses will
be regulated. But market participants said further
clarification would be needed.
Progress will be slow. While four new regulatory bodies will
be operational from January 1, the rest of the
Commission’s proposals – even if they are
rubber-stamped into law – will not come into force
until July 2012.
Nuts and bolts
The approach to deciding what will be cleared mirrors that
proposed in the EC’s June consultation paper.
There will be two methods: bottom-up and top-down.
The bottom-up approach would involve a CCP deciding to clear
a contract, and having this approved by a national authority.
The authority must then inform the new European Securities
Markets Authority (Esma), which will decide whether a clearing
obligation should apply to all such contracts in the EU.
In the top-down approach, Esma and the European Systemic
Risk Board, its macro-prudential counterpart, would decide
which contracts should be subject to mandatory clearing.
Unsurprisingly, it was this suggestion which drew most chatter
from the market. Clearing houses want the right to choose what
they clear, while many trading participants resent the idea of
being forced to use central counterparties (CCPs).
Firms cannot avoid a central clearing requirement by
deciding not to participate in a CCP. Those that fail to meet a
CCP’s participation requirements or do not wish to
be clearing members must access CCPs through other clearing
In addition, CCPs must not limit their links to execution
venues with which they have a relationship or which are part of
the same group. A CCP authorised to clear eligible derivatives
will have to clear those contracts on a non-discriminatory
basis, irrespective of the execution venue.
So far as interoperability goes, the bill effectively
obliges clearing houses to open their doors to trades from all
sources, but allows exchanges to keep their doors shut
– insisting users clear at only one clearing
National authorities will remain responsible for authorising
and supervising CCPs, but Esma will also play a part in
authorising them, and will draft technical standards for them.
CCPs in countries outside the EU will have to meet the
conditions set by Esma.
Esma will also be responsible for the surveillance of trade
repositories and for granting or withdrawing their
One market participant thought Esma would be a far more
powerful organ than the present Committee of European
Securities Regulators – adding that, with respect to
the UK, this could be a problem: "There is this concern in the
UK, of Esma trying to manoeuvre things, and the Bank of England
having to cede power. The right corridors haven’t
been opened to engage on that yet."
… but plenty to worry about
Clearing houses should keep the right to have a final say on
what contracts they clear, contrary to the thrust of draft EU
legislation, according to leaders of the European futures
The Futures and Options Association and its affiliate, the
European Industry Council spoke out against provisions that
will allow regulators to force clearing houses to accept some
trades. Roger Liddell, CEO of LCH.Clearnet, sits on the
The FOA and EIC, who believe centrally clearing derivatives
could be more expensive than trading them over the counter in
some cases, have previously warned that increased costs from
clearing should not be allowed to become so large that they
outweigh the benefits of using derivatives to hedge risk.
Lobbying efforts on behalf of corporate derivatives users
have borne fruit. The bill contains an exemption from the
clearing requirement for non-financial users. But industrial
firms holding derivatives positions above a certain information
threshold would have to have their trades centrally cleared and
report transactions to a trade repository. And the FOA has
criticised the fact that financial firms, such as fund
managers, will not have be exempt when they use derivatives to
Standards will be drawn up by the European Securities
Markets Authority, the European Systemic Risk Board and other
relevant authorities. The move towards clearing and reporting
echoes that in the US, where the Depository Trust and Clearing
Corporation launched an equity derivatives trade repository
Anthony Belchambers, the FOA’s chief executive,
warned that the final act could look very different from the
bill. "In general, the text of the regulation is in line with
expectations," he said, "but it has to be reviewed by the
European Parliament, where there is a heady and very
differentiated mix of political views and priorities. I hope
that pragmatism and proportionality, rather than populism, will
be the outcome."
"We need to educate MEPs on the subject of OTC derivatives,"
agreed a market source. "Most of them don’t know
anything about it, and even more of them don’t
Other concerns centre on collateral requirements –
something one source said would not just affect products newly
mandated for clearing. "There will be much more collateral
required for CCPs," he stated, "but also much tougher
requirements for any stuff that’s not cleared. The
question is: is there enough collateral in the world to support