Significant progress has been made in moving standardized derivatives trades to central counterparties (CCPs), in line with commitments made by the Group of 20 (G-20). Approximately 77% of interest rate derivatives notional outstanding is now cleared, according to the Bank for International Settlements.
The increased importance of CCPs has focused attention on the resiliency and oversight of these entities. In the European Union (EU), this has resulted in a series of measures, including a proposed overhaul of how CCPs are supervised. As part of the proposed changes, known as EMIR 2.2, those third-country CCPs deemed to be of significant systemic importance could be required to relocate to the EU as a last resort.
ISDA believes a location policy presents serious risks, and could have implications for effective coordination and cooperation between global regulators. A better outcome would be to develop a model of supervisory cooperation that enables EU supervisors to exercise appropriate and proportionate oversight of CCPs that provide clearing services in the EU.
This paper explores how enhanced supervisory cooperation might work in practice.
It also examines the risks involved in migrating third-country CCP portfolios to the EU. ISDA’s analysis finds all of the suggested methods for migration have significant weaknesses, and could lead to higher costs and operational disruption for market participants.