The European Association of CCP Clearing Houses (EACH) responded to the European Commission ‘Targeted consultation on the review of the central clearing framework in the EU’. In its response, EACH made amongst others the following proposals to address the existing regulatory barriers to further improve CCPs risk management and making CCPs more competitive:
- More efficient approval of new products and improvements to risk models: EACH is of the opinion that the current approach for approving new risk management products and improvements to risk models as well as the new one recently proposed by ESMA are not efficient. Based on the evidence gathered by EACH, its response includes suggestions about how to improve this situation so that CCPs in the EU are able to efficiently improve their risk offering, therefore leveling the playing field with third-country jurisdictions.
- CCPs access to central bank facilities: while CCPs provide robust and independently tested risk management schemes in line with public authorities’ guidelines and regulation, EACH requests the European Commission to consider ways of promoting a more standardized access to central banks facilities in the interest of financial stability and integrity, especially important in an eventual situation of unprecedented market stress.
- Anti-procyclicality (APC) measures: the recent ESMA consultation on anti-procyclicality further increases the granularity to which EU CCPs are subject to and seems to further tighten EU CCPs risk management ability. This not only creates a unlevel-playing field with third-country CCPs but most importantly represents a concern from a risk management point of view. EACH suggested taking this into consideration when examining the Final Report that ESMA will prepare on this subject.
- CSDR: EACH calls for the removal of unnecessarily complicated duplicative system included in the CSDR Settlement Discipline Regime (SDR). Market participants should be able to use one single system through CSDs, rather than two parallel systems through CSDs and CCPs.
- Clearing obligations by PSAs: EACH is in favor of providing the right solutions for making clearing more attractive for Pension Scheme Arrangements (PSAs). EACH believes that a collateral transformation via the repo market could be a suitable and sustainable solution for making clearing in the EU more attractive for PSAs.
- Clearing by public authorities: CCPs are offering access to central clearing to public entities, either directly or as a client of a clearing member. Furthermore, direct and sponsored access models may also be an attractive central clearing solution for some public entities and other market participants.
- Broadening the scope of the clearing obligation: EACH would welcome European Commission commitment to regularly apply a holistic review in detail the product scope of the clearing obligation, and, in particular, introduction of incentive measures to centrally clear any additional products not subject to the clearing obligation or to extend the clearing obligation to any products.
- Expanding the list of highly liquid financial instruments: the European Commission should consider expanding the list of highly liquid financial instruments in regard to CCPs’ investment policies by including, e.g. covered bonds and money market Funds (under certain conditions). EACH suggests extending from 2 years to 5 years the average maturity time.
- Eligible collateral: the European Commission should consider whether the current list of eligible collateral by CCPs can be expanded to e.g. non-cash collateral or equity as long as it meets the relevant risk management requirements.
- Settlement Finality directive (SFD): all CCPs could receive protection under the SFD for their default management rules and procedures if authorized or recognized by the EU. It would be helpful for indirect participants to benefit from protections if this furthers protects the CCP’s default management rules and procedures.
- Blockchain and DLT: EACH members understand the potential impact that DLT technologies may have on the CCP business and on financial markets. However, the benefits of clearing transactions through a CCP will not become obsolete in the future. In particular, EACH noted that certain functions of the CCP, including multilateral netting and netting between different asset classes as well as collateral and default management processes, will remain unique features of central clearing.