ANALYSIS: Europe to promote competitiveness amid regulatory roll-out

Speaking at the Eurex Derivatives Forum event in Frankfurt on Wednesday, the chair of the central counterparty (CCP) Supervisory Committee at ESMA said the authority plans to increase the attractiveness of EU CCPs through its latest round of rulemaking.

ESMA launched a consultation in November which outlines regulatory technical standards including new requirements for trade reporting, including margin details and updated identifiers for the latest European Markets Infrastructure Regulation (EMIR 3.0) framework.

“EMIR 3.0 is designed not just to enforce resilience but also to enhance the competitiveness and attractiveness of the EU clearing houses,” Klaus Loeber said in a keynote address. “ESMA is pursuing in this regard two complementary approaches. First, we aim to reduce obstacles for EU CCP competitiveness on a global scale and we also aim to further enhance and strengthen the resilience of the clearing ecosystem to make EU clearing more attractive.

“For the first part, we are working in particular on accelerating time to market for new products and models. EMIR 3.0 will shorten significantly timelines for opinions and validations to allow faster product launch and a faster model review. As many of you are aware the current processes can take significant time, EMIR 3.0 is slashing these timelines to a few months at most, with stringent caps provided by the law. We even have accelerated process for some minor changes which will be available within less than 15 working days. This is a significant improvement to the status quo.”

Under the EMIR 3.0 active account requirement due to take effect in late June, European firms must execute a certain number of trades in Euro swaps, Polish Zloty swaps and STIRs (short-term interest rates) at an EU CCP, subject to certain thresholds.

The move is designed to reduce European firms' reliance on non-European Union systemically important (Tier 2) clearing houses such as London-based LCH and ICE Clear Europe. LCH’s SwapClear dominates clearing of interest rate swaps denominated in euro and Polish zloty while ICE has substantial euro short-term interest rate derivatives flows, all of which are covered by EMIR 3.

“It’s fair to say that since EMIR 2 – the predecessor of the current framework – we have noticeable progress witnessed in reducing EU dependence on third country CCPs, notably with repatriation of the euro repo clearing and the partial migration of credit default swap clearing from London to the continent,” Loeber said. “However, there are still significant challenges in this regard, in particular in the area of interest rate derivatives where EU clearing participants continue to rely heavily on offshore CCPs.

“To mitigate these risks and to strengthen the EU market autonomy we will continue to develop enhanced frameworks to manage these cross border risks, to assess potential propagation channels and emerging technological channels and to ensure the continued direct supervision of systemically important Tier 2 CCPs.”

The European Commission confirmed this month a new equivalence determination stretching out to June 2028 for systemically important (Tier 2) CCPs.

“On the side of ESMA we have launched our own follow up work in this regard,” Loeber said. “We need to take a decision on the re-recognition of the UK CCPs, but overall – and there have been some discussions on the three year period – I believe three years will allow us to take a thorough look at whether the existing measures under EMIR 3 will have a noticeable impact on whether we need to consider alternatives if this fails to materialise the risk mitigating effects that we are hoping for.”

Trade bodies the FIA and the International Swaps and Derivatives Association (ISDA) welcomed the extension of recognition but argued European regulators should go further by establishing a permanent arrangement.