U.S. regulators and legislators welcomed the news that the EU will not attempt to regulate U.S.-based central counterparties.
The European Commission published for public comment three proposals to facilitate a tiered system of regulation of non-European central counterparties (CCPs). One proposal specifies the criteria for determining the systemic importance of a third-country CCP. A second proposal introduces a system for comparable compliance whereby systemically important, or "tier 2," CCPs may substitute regulation by their home nation. The last proposal relates to fees. The leaders of a House Agriculture subcommittee welcomed the news, particularly the EU’s assurance that U.S. CCPs will not be classified as tier 2, and the head of the CFTC touted it as an example of international comity and deference.
Two-tier system. Regulation (EU) 2019/2099, published in December 2019, introduces a two-tier system for third-country CCPs. CCPs that are not systemically important are classified in tier 1 and may continue to offer clearing services in the EU, subject to compliance with their equivalent home rules. Tier 2 comprises systemically important CCPs, which must comply with the European market infrastructure regulation (EMIR) and submit to ESMA supervision. If the home country of a tier 2 CCP has comparable regulatory requirements, it may be deemed to comply with EMIR via a newly introduced system of comparable compliance. The proposals are open for comment for 30 days.
Criteria for tier assessments. Under Article 25(2a) of EMIR, ESMA must take into account five criteria when determining if a third-party CCP is systemically important: (1) the nature, size, and complexity of the CCP’s business; (2) the effect of the failure of or disruption to the CCP; (3) the CCP’s clearing membership structure; (4) alternative clearing services provided by other CCPs; and (5) the CCP’s relationship, interdependencies, or other interactions. The proposal expounds on these criteria in greater detail, taking into account feedback from ESMA and other stakeholders. Stakeholders were particularly concerned that the factors lead to predictable outcomes, that the administrative burden be minimized, and that a CCP’s nexus to the EU be properly considered.
The EC took into account that some factors should be given priority, but that all should be considered and none should be determinative. To streamline the process, ESMA would first need to assess quantitative indicators to gauge whether a CCP is on the borderline between tier 1 and 2. CCPs that meet certain thresholds would then need to provide additional information to allow a more granular determination. The Commission notes that a lot of this information is already public, which will reduce the burden on CCPs and reduce the risk of information breaches.
Comparable compliance. A tier 2 CCP may ask the European Commission to assess whether it complies with EMIR through its compliance with its domestic law. Prior to the public consultation, some stakeholders cautioned that a line-by-line comparison between regulations could exclude CCPs from countries whose rules, while not identical to EMIR, achieve the same outcome. A line-by-line assessment would also require a burdensome amount of information from CCPs and perhaps drive them out of the EU market. Stakeholders also expressed concerns about establishing different benchmarks for so-called core provisions of EMIR and highlighted the need for ESMA to work with third-country regulators. Most stakeholders said that ESMA’s compliance assessment should reflect, or even adopt, the EC’s equivalence assessment.
After considering three policy options, the EC decided on one that would analyze whether compliance with third-country rules satisfies the EMIR rules applicable to tier 2 CCPs, taking into account the EC’s preexisting assessment. This would factor in the equivalence assessment and limit the burden on CCPs, but without preempting ESMA’s assessment or jeopardizing EU financial stability, the proposal states. The EC also proposes to indicate the minimum elements that ESMA should verify to ensure comparable compliance.
Fees. The final proposal sets out the fees that ESMA may charge to third-country CCPs. Stakeholders largely supported the fee structure, but some felt that they could be a barrier to entry by smaller CCPs. Most agreed that the fees should be proportional to the tasks performed by ESMA, predictable, transparent, and justifiable.
The proposal is to establish a basic recognition fee of EUR 50,000 payable when the CCP applies for recognition, with tier 2 CCPs to pay an additional top-up fee of EUR 360,000. All third-country CCPs would pay annual fees as well, with the tier 1 fee being a flat fee and the tier 2 fee proportional to CCP turnover. The tier 1 annual fee is estimated to be around EUR 50,000, but it will vary over time because it is tied to ESMA’s tasks and costs.
Reactions. The leaders of the House Agriculture Subcommittee on Commodity Exchanges, Energy, and Credit issued statements welcoming these developments. Chairman David Scott (D-Ga) said the proposal "will empower the CFTC and European regulators to uphold a cooperative framework and will promote strength and stability in global derivatives markets." Ranking Member Austin Scott (R-Ga) was "heartened that our European colleagues were willing to address our substantive concerns with the reach of EMIR 2.2." Ranking Member Scott refers to the EU’s determination that U.S. CCPs will not be deemed tier 2 CCPs. "Chairman Scott and Ranking Member Scott have repeatedly made it clear in the past that the Subcommittee would not accept EU control in any form over U.S.-based CCPs or other domestic financial markets," according to a press release from the Subcommittee.
CFTC Chairman Heath Tarbert said the proposals "balance the fulfillment of [the EU’s] objectives and responsibilities with deference and international comity as to home country supervision of U.S.-based derivatives clearing organizations operating in Europe." Tarbert also said that "deference is a two-way street" and the CFTC will consider how it can extend similar deference and comity to the EU and other jurisdictions as appropriate.
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