FIA held the latest in its series of European forums in Frankfurt on 12 October, bringing together market participants and regulators to discuss key EU policies and technology developments impacting the cleared derivatives markets. Among the major topics of discussion were active account requirements for central clearing, market trends, operational resilience and technology innovations.
Fiona van Echelpoel, deputy director general at the European Central Bank, opened the discussions with a keynote address on the EU’s efforts to strengthen the resilience of its financial markets. These include reviewing and “recalibrating” the EMIR regulatory framework that applies to EU CCPs and clearing participants, known as EMIR 3.0.
“Building resilient and attractive financial markets in the EU is one of the main objectives of the EU Capital Markets Union, which has been in the making for more than a decade. Clearing is an integral part of these efforts,” van Echelpoel told the audience.
Active accounts
One of the most far-reaching proposals in the EMIR review is a requirement for financial institutions to hold active accounts at CCPs in the EU, and use those accounts to clear a certain proportion of their derivatives trading. The proposal aims to reduce the EU’s “over-reliance” on UK CCPs and focuses mainly on euro-denominated interest rate swaps and futures.
Policymakers, including the ECB, take the view that effective monitoring and crisis management can only be ensured through direct access by EU authorities.
Despite repeated calls from policymakers for EU firms to reduce offshore exposures, there has been very little change, van Echelpoel said.
“The ECB considers the active account requirement proposed by the European Commission in EMIR 3.0 an important first step to reduce systemic risk and to increase the resilience of EU financial markets,” she said.
She added that to move forward with the requirement, a comprehensive impact assessment needs to be undertaken by the European Securities and Markets Authority.
“There has to be a thorough analysis before deciding on thresholds, or exemptions, or other metrics. We maintain that this is best achieved through an impact assessment conducted by ESMA,” she said. European regulators have been in continuous dialogue with market participants who have brought forward various concerns regarding competitiveness and costs associated with the active account requirements, van Echelpoel added.
“These are valid concerns that should be clearly reflected in calibrating the active account requirement,” she said. “For example, a phased approach to active accounts would create an effective mechanism to control costs and risks by implementing thresholds that are binding and effective in reducing exposure.”
This view was echoed by David Dietrich, Securities Supervision/Asset Management at German regulator BaFin, who spoke on a panel at the Frankfurt event that explored the priorities of lawmakers ahead of EU Parliamentary elections and the formation of a new European Commission next year.
“We are in support of having the incentive of an active account requirement, including quantitative thresholds. These discussions are highly political; nevertheless, we will find proper and proportionate solutions to achieve the goal of EU strategic autonomy through an active account element,” Dietrich said.
Rudolf Siebel, managing director at BVI, the German fund industry association, voiced support for active accounts in principle but cautioned against setting numerical targets for the volume of derivatives that must be cleared through these accounts. He explained that while the BVI is in favour of setting up active accounts, it was against the “introduction of quantitative thresholds for active accounts at this stage”.
Also speaking on the panel were representatives from EU clearing member firms who took an opposing view on the active account requirement, citing fragmentation, and extra clearing and operational costs. They warned EU clearing members could lose client clearing business to non-EU clearing members, which will remain able to transact in global markets without restrictions. The panellists were particularly opposed to an introduction of quantitative thresholds.
“There needs to be more nuance and looking at the details, not just throwing out some thresholds that aren’t achievable for the markets,” said Julia Kolbe, director, head of capital markets & UK policy, Deutsche Bank. “This needs to be looked at by different instruments, different types of counterparties, maturities and so on. Just talking about thresholds is not the right way to approach this.”
Market trends
Market trends, managing market volatility and ways to make EU markets more attractive and more efficient were the key themes of the next panel.
Robbert Booij, CEO Europe, ABN AMRO Clearing, discussed the impact of rising margin requirements on clearing members and a shift by market participants to OTC markets because of increasing margin calls.
“In terms of trends, what we have seen over the last couple of years is a very significant increase in volatility on the back of events in Ukraine and a resulting spike in energy prices. There is also uncertainty in the markets now following the terrible events in Israel last week,” said Booij.
“All these factors combined significantly add up to elevated margin requirements for CCPs. The moment margin requirements increase, clearing members need to find margins on behalf of their clients, which impacts clearing member capacity. We want our clients to increase their positions, we want our clients to do more, but capacity is limited.”
He added that there has also been a shift by market participants from centrally cleared markets to OTC markets, particularly in the energy space, which has the danger of increasing counterparty credit risk in the ecosystem.
“We talk a lot about moving business towards European CCPs, but we need to look beyond CCPs, to the other layers in the chain such as the clearing members, because there are only a few of us who actually do client clearing,” he said.
Helen Gordon, global head of clearing product development and strategy at JP Morgan, talked about challenges on the horizon for global clearing firms, pointing to proposals in the US to implement the final components of the Basel III agreement, known as the Basel III endgame, and proposed adjustments to the calculation of the capital surcharge for global systemically important banks.
“These are going to result in more capital being held by clearing members, particularly for OTC clearing under the agency model, which is critical to a number of participants in the market,” Gordon said.
Speaking about how to make EU markets more attractive, Matthias Graulich, global head of fixed income, funding & financing strategy, Eurex, pointed to some of the proposals in EMIR 3.0, which include the streamlining of EU supervisory procedures for the approval of new products and model changes.
“To change a risk model or introduce a new product, it would sometimes take us two years in the regulatory approval cycle. EMIR 3.0 finds a middle ground to make it quicker for European CCPs to get approvals on new products and services,” he said.
Christoph Hock, head of multi-asset trading, Union Investment Privatfonds, emphasised the importance of innovation, standardisation, scalability and broadening the range of products for investors.
Operational resilience
Operational resilience was another key theme at the forum with panellists discussing how the industry can better react to outages and recover safely and quicky following an incident. The EU's new Digital Operational Resilience Regulation and the Bank of England’s Critical Third-Party Regulations also came under the spotlight.
Other discussions looked at reporting compliance ahead of the go-live of EMIR Refit reporting rule changes in April 2024, and how the industry is innovating for the future, with panellists considering the contributions being made by cloud and AI technologies and the digitisation of markets and processes.
In a discussion on reporting compliance, panellists agreed that regulatory reporting is one of the most collaborative spaces in the derivatives markets and that industry forums and groups are essential in bringing together all stakeholders and working to resolve challenges.
The Refit go-live in April 2024 is just one of many reporting rules changes on the horizon, so managing resources and priorities is key, the panellists said. They added that co-dependencies exist and will be key to ensuring industry preparedness, and that clearing members need clear timelines from CCPs and third-party vendors on the availability of data and testing windows.
The panellists were hopeful that there would be further efforts to align global reporting regimes, although they acknowledged that this would not be an easy task.
On the innovating for the future panel, speakers discussed the role of Generative AI in improving market efficiency and the impact of regulation on the ability to implement technology solutions and more cutting-edge technology.
FIA forums are highly collaborative regional events that provide an opportunity for policy makers and industry participants to engage in conversations about the crucial issues affecting their markets. Visit FIA.org/events for more information on conferences taking place this year and in 2024.
