EACH responds to CPMI/IOSCO paper on client clearing and portability

  • Client clearing:
    • Positive impact of direct and sponsored access models – EACH Members expect direct and sponsored access models to have a positive impact on the clearing landscape because they provide an alternative to traditional client clearing with mutual economic, risk management and operational benefits for agents, sponsors and participants.
    • Access of direct and sponsored access models to increase – While current evidence shows that direct and sponsored access models are more widely use by larger clients, EACH expects these access models to be further embraced by a greater range of clients over time with the benefits of reduced counterparty risk.
    • CCPs’ robust and independent risk management procedures will also apply to client access models – European CCPs have worked with market participants to install specific safeguards for access models. Therefore, CCPs ensure the same high risk management standards for direct/sponsored access models as for a standard clearing membership.
  • Portability:
    • Portability is a key feature of an adequate default management procedure and requires a proper regulatory framework and incentives that promotes the possibility to port clients in case of a clearing member default.
    • EACH agrees with the discussion paper’s suggestions of practices that promote porting such as i)pre-emptive identification of potential alternate CCSPs, and ii) account structures that facilitate fully margined client positions. EACH recommends that identification of an alternate Client Clearing Service Provider (CCSP) should come from the client, given that client consent is required in the EU and CCPs cannot assume what the client’s choice will be.
    • EACH makes the following additional suggestions in the interest of successful porting:
      • Gross margined accounts easier to port – Net omnibus client account structures where several clients need to consent on the same replacement CCSP make it more challenging to port clients as opposed to gross margined ones.
      • Holding excess collateral helps improve the likelihood of successful porting – The CCPs ability to provide enough time for the client to find a replacement clearing member will be directly proportional to the collateralisation of such client. Over-collateralisation, or re-collateralisation during the porting period will help the CCP having comfort giving the needed time without burdening its clearing community with additional risks.
      • Subject to permission under applicable law, a negative consent or ex-ante client consent mechanism that would allow the CCP to port the client would contribute to a smoother porting regime.
      • Increase communication between clearing members and CCPs – EACH encourages clearing members to further initiate discussions with CCPs on how to manage their clients together in the event of a default.
      • Regulatory requirements – A temporary waiver of certain regulatory requirements such as KYC and AML would aid a swifter process in finding back-up CCPs.

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