On 29 July, FIA, ISDA and AFME responded to the ESMA consultations (i) draft technical advice on criteria for tiering under Article 25(2a) of EMIR 2.2; and (ii) Technical Advice on Comparable Compliance under article 25a EMIR.
The response outlines that the indicators proposed by ESMA, that shall assist with the determination of whether a Third-County CPP (TC-CCP) is systemically important, are so broad as to effectively preclude legal certainty and therefore ESMA’s technical advice would benefit from:
amendments to provide more detail as to what ESMA will take into account as part of its assessment of each factor (with examples of how each indicator would affect the assessment) to ensure a fair and consistent application of the criteria for tiering under Article 25(2a) of EMIR; and
restructuring of the indicators to grant priority to those which ESMA considers to be instrumental to its assessment, and to indicate where and how other criteria may support such assessment without being decisive. This would assist with clarifying which TC-CCP’s business may have a systemic impact on the Union or one or more of its Member States and are therefore intended to fall within Tier 2.
The Associations are of the view that the indicators should be amended to be more specific and to provide more detailed guidance as to how the numerical information to be provided by TC-CCPs will be taken into consideration by ESMA. Such guidance should take the most relevant and helpful form which could include illustrative examples based on quantitative thresholds (for example, in the context of indicators 3, 10 and possibly also 6) so that TC-CCPs may get a sense of their likely classification as Tier 1 or Tier 2 CCPs when seeking recognition under EMIR.
More structured and specific sub-indicators would be preferable, rather than a list of the factors that ESMA may, in its discretion, consider. FIA, ISDA and AFME agree with ESMA’s approach of not including hard thresholds for all TC-CCPs, as this would be challenging to develop and may give rise to a risk of TC-CCPs falling within or outside of Tier 2 based on a single indicator. However, without any thresholds, the tiering process may become cost and time intensive process, particularly for those entities which are not systemic for the EU market. As such, more detailed factors, including practical examples, would assist with clarifying the scope of ESMA’s assessment.
The Associations further recommend adopting a proportionate approach, e.g. by imposing a de minimis exemption for smaller TC-CCPs such that they are required to only provide a limited sub-set of information, TC-CCPs are less likely to be disincentivised from applying for recognition and therefore access for EU clearing members and market participants should be preserved. In addition, the Associations recommend that the indicators, and related considerations, be clarified to clearly establish a direct nexus to the EU or one of its Member States.
While the response acknowledges that elements of a requirement-by-requirement approach may be helpful in conducting an assessment as to whether a TC-CCP can be deemed to be comparably compliant with the relevant EMIR requirements, there is a risk that this approach may result in a TC-CCP operating in a jurisdiction in which the rules applicable are deemed by the Commission to achieve the same regulatory outcome as across the EU, but on a requirement-by-requirement level ESMA may consider that the rules applied by the TC-CCP may not compare sufficiently. In such a situation, where the requirements applied by a TC-CCP are determined by ESMA to not be comparable, it will be required to comply with the EMIR requirements.
FIA, ISDA and AFME support an outcomes focused approach for ESMA’s comparability analysis, rather than a strict line-by-line approach, in order to ensure that TC-CCPs which are subject to conservative rules in their home jurisdiction are not determined to be non-compliant on the basis of a minor deviation from one of the EMIR requirements.
The Associations recommend that ESMA’s comparability analysis and final assessment approach should be consistently applied to all CCPs. It is important to ensure that, following its comparability analysis, ESMA’s final assessment of the comparability of each requirement is genuinely outcome based taking due account of the equivalence decision adopted by the Commission with respect to the TC-CCP’s home jurisdiction and the extent to which the financial instruments cleared by the TC-CCP are denominated in Union currencies (see EMIR 2.2. Recital (41)).
ESMA may wish to consider whether a deviation from one of the requirements in EMIR could be offset by compliance with another more conservative provision corresponding to another EMIR requirement, so that on the whole, the third country requirements applied by the TC-CCP in question would allow it to deliver the practical outcome of ensuring that EMIR’s regulatory objectives on the relevant issue are achieved. Further, even if requirements are closely related (e.g., requirements for margining, liquidity risk management, stress testing, etc.), a strict line-by-line approach may not allow ESMA to look at requirements holistically or make an outcomes-based determination of a TC-CCP’s comparable compliance.
The associations encourage ESMA to liaise with third country regulators, and in particular with those who already have assessed the comparability of the EU CCP regime, in order to ensure that ESMA has a comprehensive picture and understanding of the rules applicable to the TC-CCP in question as well as how their enforcement is ensured and monitored by the relevant third country regulators across major derivatives markets.