Regulators and market leaders debated the merits of centralised supervision in the EU, challenges in implementing EMIR 3.0, and the UK’s approach to systemically important clearinghouses, among other topics, at FIA’s forum in Paris last month.
Central supervision of key areas of the EU’s financial markets – currently handled by national authorities – was a central theme, reflecting a broader political debate that has intensified in recent months.
The European Commission views central supervision of trading and post-trading infrastructures, as well as crypto service providers, as crucial to building a more integrated and globally competitive capital market in Europe – a central pillar of the EU’s Savings and Investment Union.
Larger EU member states, led by France, have long advocated for transferring more supervisory power to the European Securities and Markets Authority. Smaller countries such as Luxembourg, Malta and Ireland, however, remain resistant to ceding national control.
Direct supervision
Speaking on a panel about the regulatory landscape in Europe, Anthony Attia, global head of derivatives and post-trade at Euronext, said that while there is opportunity for growth and innovation in Europe, harmonised regulation, single supervision and the removal of gold-plating for cross-border trading are necessary to support European competitiveness.
“Direct ESMA supervision is essential. This should be risk-based rather than principle-based for large and cross-border financial market infrastructures, including FMIs belonging to a group. A dedicated governance structure with a board consisting of independent members with an EU mandate for supervisory decisions rather than EU27 NCAs would be welcome,” Attia said.
He added that Euronext supports a competitiveness objective for ESMA. "We have long argued that a 'competitiveness test' should be incorporated into policymaking before introducing new rules.”
Gaspard Bonin, deputy global head of derivatives execution and clearing at BNP Paribas, highlighted potential efficiencies from a centralised supervision model.
“We are, in principle, in favour of centralised supervision for infrastructures like CCPs and CSDs, although we need to be careful in the details,” Bonin said. “It could help create a level playing field within Europe. It could also improve time to market and reduce costs.”
Audrey Metzger, director of innovation and financial market infrastructures at the Banque de France, noted the central bank’s support for the integration of supervision for systemic financial market infrastructures and outlined two potential models.
“The first option would be to have ESMA supervise all CCPs in Europe, the other would be to implement a two-tier mechanism where ESMA would supervise the systemic CCPs in Europe, and other CCPs would remain under EMIR 3.0 provisions,” Metzger said.
“When it comes to governance, we believe the ESMA CCP Supervisory Committee is performing effectively as the decision-making authority for CCPs,” she said. “This approach could be replicated in an integrated supervisory framework. A joint supervisory team would find the right balance between harmonisation, thanks to ESMA’s position, while also taking into account the specific features of national financial market infrastructures.”
Nicoletta Giusto, an independent member of ESMA’s CCP Supervisory Committee, said there is a strong case for the watchdog to have direct supervision of pan-European market infrastructures in the EU, like CCPs, CSDs and stock exchanges, as well as newly supervised entities such as large CASPs.
“For entities like CCPs that are cross-border, there is a case for going towards more integration and direct supervision,” she said. The idea was discussed during EMIR 3.0 negotiations, which ended two years ago, but was not adopted. “Let’s see if there is a shift in support for this,” she added.
Giusto said the CCP Supervisory Committee has been "intensively active" recently, adopting an increasing number of opinions, participating in on-site CCP inspections, and holding frequent bilateral co-chairs meetings to coordinate the activities of supervised entities.
“The Committee has also introduced, for the first time in our annual review, a risk assessment of CCPs, and we are continuing to improve comparability to ensure that the same approach is followed in all parts of Europe where there are CCPs. To me, this is really important to ensure a level playing field,” Giusto said.
“Compared to other segments of the European capital markets, the world of clearing is more harmonised already, but we have seen through the activities this year that there are different approaches in the supervision of CCPs, and the CCP Supervisory Committee plans to intensify efforts in this respect,” she added.
EMIR 3.0. Implementation
Another topic under discussion was the challenges that clearing firms and clients are facing in implementing the active account requirement under EMIR 3.0, particularly in relation to representativeness and reporting.
Banque de France’s Metzger recalled the aim of the active account requirement: “To stimulate location of EUR transactions clearing in the euro area, simply because only euro area authorities are in charge of euro area financial stability. We cannot rely on non-euro area authorities to ensure euro area financial stability, because it is not their mandate.”
The active account requirement comprises two parts: an operational requirement to maintain an account with an EU CCP, and a representativeness requirement obliging EU counterparties to clear a proportion of trades through an EU CCP. Critics argue that regulators and market participants interpret the representativeness requirement differently, and that reporting on representativeness will not provide meaningful information for compliance monitoring purposes.
“There are still some questions concerning the details of how the representativeness requirement works,” said BNP Paribas’ Bonin. “Some clients might opt to route all their business through Eurex Clearing, but for those with large portfolios, this is probably not a viable option from an economic or best execution perspective. Implementation is a challenge and so is reporting on the representativeness to ESMA. Besides, Article 7d of EMIR 3.0 – covering the reporting of activity at non-EU CCPs – needs to be specified by RTS that do not yet exist. We are developing solutions to help our clients on the reporting side.”
ESMA’s Giusto told the audience that ESMA is working on formalising its views on the practical implementation of representativeness reporting despite existing constraints.
“Regarding representativeness, until the European Commission publishes the final text, at least to Parliament and the Council, we encourage you to rely on what we have included in our RTS, which reflects the approach agreed by the ESMA board,” said Giusto.
“National competent authorities are responsible for the implementation of the active account. It was decided not to give this power to ESMA, which perhaps would have been easier. However, we are discussing general reporting requirements in the context of EMIR 3.0, including representativeness reporting, and will formalise our views on Article 7d in due course,” she said. “Be assured that despite the constraints we face, we are working on all questions we receive, whether from authorities or directly from the industry.”
The UK stance
Offering a UK regulatory perspective to the panel, Barry King, head of post-trade policy at the Bank of England, outlined the Bank’s approach to systemically important CCPs.
King said the UK recognises non-UK CCPs when their home regulator demonstrates a comparable level of supervision and oversight against international standards – a more flexible stance than the EU’s tighter equivalence regime.
“We’re conscious that UK CCPs are significant, not just in the EU, but also in the US and other jurisdictions,” King said. “Likewise, many CCPs in Europe, the US and Asia are systemically important to us. They receive close attention, and we spend time engaging with their supervisors, setting up cooperation arrangements and participating in supervisory colleges and crisis management groups to ensure coordination in the event of a crisis.”
He added that the Bank formed its first CCP colleges in 2012 and remains “deeply committed to ensuring that, should the worst happen, it unfolds in an orderly and well-understood way.”
FIA will continue its European events with a forum in Brussels on 4 November. The forums provide an opportunity for discussions to take place between regulators and the industry, and for participants to engage in productive conversations about the issues affecting their markets.
Visit FIA Flickr to see photos from FIA Forum Paris.
