The European Securities and Markets Authority (ESMA) has issued the results of a peer review it conducted into how national competent authorities (NCAs) ensure that central counterparties (CCPs) comply with requirements under the European Markets Infrastructure Regulation (EMIR). ESMA’s peer review covered the supervision by NCAs of CCPs’ default management procedures (DMP), including how they simulate the default of a clearing member (fire drills).
Overall, ESMA found that NCAs supervise DMPs adequately and that most EU CCPs have performed fire drills. However, the report also highlights the areas where divergences emerged with respect to NCAs’ supervisory approaches related to reviewing and testing of DMP and fire drills. It also identifies areas where supervisory convergence could be further enhanced, and highlights existing good practices. A possible case of non-compliance with EMIR was also identified in the area of the frequency of fire drills, which will require further follow-up.
Recommendations to enhance supervisory convergence
ESMA identified the following areas for improvement in order to enhance supervisory convergence, including:
- CCPs should undertake a regular and comprehensive review of CCPs’ DMP; and
- NCAs should encourage CCPs to perform fire drills unannounced to most of their staff in order to assess the readiness of CCPs. This would allow CCPs to identify more realistically the impact a default may have on time and staffing.
ESMA will use the findings of this peer review to enhance supervisory convergence between NCAs. ESMA has a coordination role between NCAs and across CCP colleges with a view to building a common supervisory culture and consistent supervisory practices, ensuring uniform procedures and consistent approaches, and strengthening consistency in supervisory outcomes.