Negotiators from the European Parliament and the EU Council reached agreement on the proposal for a regulation establishing a single recovery and resolution framework for authorised central counterparty clearing houses (CCPs) in the EU on the evening of Tuesday 23 June.
These CCPs provide the link between two parties to a financial transaction. Currently, some clearing houses have credit institution status and are subject to the banking regulatory and prudential framework, while others are considered as market infrastructures and do not have to apply the same rules as their competitors.
In general, the Commission's legislative proposal, presented at the end of November 2016 (see EUROPE 11677/8), proposes that from now on all clearing houses authorised in the EU should be subject to a single regime of redress and resolution.
The agreement reached between the co-legislators broadly maintains the architecture of the Commission's three-stage proposal, namely: - the development of preventive resolution and recovery plans; - the possibility for competent authorities to intervene in CCP operations when their viability is at risk, but before they have reached the stage of default; - the activation of resolution plans.
As part of the resolution plans, negotiators agreed to distinguish between a “default event”, when one or more clearing members fail to honour their financial obligations, and a “non-default event”, such as a business failure incurring losses. The text asks CCPs to draw up comprehensive and effective plans for dealing with both cases.
Resolution tools
Negotiators have agreed on a closed list of resolution tools, which includes: - cash calls (additional contributions) to non-defaulting clearing members; -variation margin gains haircutting or VMGH; - the partial tear-up of CCP contracts; - the sale of the CCP or parts of its business; - the creation of a bridge CCP; - the use of government stabilisation tools as a last resort. A review clause has also been inserted to re-assess this list of tools.
One of the last issues to be resolved was the “second skin in the game”, which provides that in the event of a default by a clearing member, CCPs must use their own resources and may require further financial contributions from non-defaulting members before the competent authorities intervene (see EUROPE 12511/17).
The European Parliament, it seems, won its case on this issue, since the text introduces a pre-funded “second skin in the game”, to be used after the default fund, which will be further defined by the European Securities and Markets Authority (ESMA). The Parliament also succeeded in introducing into the text the prohibition or restriction of the payment of dividends and bonuses in the event of default caused by mismanagement.
Provisions have also been added on loss compensation. In particular, the co-regulators agreed that the contractual arrangements allowing clearing members to pass losses on to their clients in case of the resolution should also include, on an equivalent and proportionate basis, the right for clients to any compensation that clearing members receive.
Resolution Colleges
On the issue of the composition of the resolution colleges authorities for each CCP, it appears that the EU Council has been successful (see EUROPE 12426/7).
The initial proposal did in fact limit participation in colleges to members of the clearing house concerned. However, in order to satisfy countries - such as Luxembourg or Malta - which do not have a CCP, the EU Council wanted representatives of all interested parties to be able to participate in the resolution college (see EUROPE 12381/12).
This is in essence the approach of the EU Council which, with some adjustments, has been chosen to align the regulation with the EMIR 2.2 Regulation, a European source confirmed this to us.
With a few exceptions, the new framework will start to apply 18 months after the date of entry into force of the Regulation. The co-legislators also took into account the Covid-19 pandemic and agreed to give one additional year for trading venues and CCPs offering trading and clearing of exchange-traded derivatives to start applying the “open access” rules in MiFIR as of 4 July 2021.
The agreement now has to be confirmed by both institutions. (Original version in French by Marion Fontana)