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EACH Responds To The ESMA Consultations On CCP Recovery And Resolution Level 2

Date 20/09/2021

The European Association of CCP Clearing Houses (EACH) welcomes the opportunity to provide feedback to the seven ESMA consultations on CCP Recovery and Resolution Level 2. EACH commends to the work of ESMA in preparing these detailed consultations. Our views, in summary, are the following:

  1. Additional amount of pre-funded CCP own resources (Article 9(15) of CCPRRR): EACH particularly welcomes that ESMA follows the advice in Level 1 to calculate the “second skin in the game” (SSITG) as a percentage of the CCP’s risk-based capital. However, the sum of all the maximum indicators’ value proposed in the consultation paper amounts to 45% of the CCP’s risk-based capital, i.e. much higher than the maximum of 25% of the CCP’s risk-based capital foreseen in the CCP RR Level 1 Regulation. This considerably increases the possibility that CCPs will have to dedicate 25% of their risk-based capital, while, to our understanding, the objective of the Level 1 Regulation is to ensure proportionality. In addition, we see a danger of some of the proposals in these consultation on CCP R&R to overlap with the prudential and other requirements under EMIR, therefore leading to legal uncertainty as to which legislation prevails. Furthermore, we would also like to underline that the SSITG should not be seen by clearing members as a guarantee for risk taken on by them. CCPs should continue to be a neutral party interposed between a buyer and a seller but should not have to cover risks entered into by the counterparties. 
  2. Conditions for recompense (Article 20(2) of CCPRRR): To balance the fair treatment of clearing members with the commercial viability and attractiveness of the CCP in the long-term, we suggest a compensation scheme that foresees dedicating to clearing members a share of profits between 10% and 25% for up to 5 years. An excessively high portion of CCP profits dedicated to compensating non-defaulting clearing members as per Article 20 could, in, the long term, potentially affect financial stability.
  3. Temporary restrictions in the case of a significant non-default event: EACH overall agrees with the two Guidelines proposed by ESMA in the consultation paper. However, we respectfully suggest ESMA to reconsider the inclusion on certain indicators e.g.: (i) the potential for a loss that results in a significant deterioration of the CCP’s capital buffer, without triggering the notification threshold; (ii) the failure of a critical third-party entity; as well as (iii) the potential loss of clearing volumes or clearing members. Certain CCP losses are usually within a CCP’s annual cash flow projections and should not be deemed as “significant deterioration”. Furthermore, the CCP has no control over a third-party entity – although third-party providers are chosen on the basis of extensive due diligence reviews – and for what concerns the potential loss of clearing volumes or clearing members, these might be linked to clients’ choice of clearing or other commercial decisions.
  4. Factors to be considered by the competent authority and the supervisory college (Article 10(12) CCPRRR): While the list of criteria included in the consultation paper results from the guidance in Level 1 legislation, we believe it is overly granular and the goal of meeting the Level 1 guidance could be achieved with a lower number of elements to be considered. While a CCP’s recovery plan should be comprehensive in line with the Level 1 legislation, we believe it should not lead to adding BAU requirements for CCPs, which are already included in the EMIR legislation.
  5. Recovery plan scenarios (Article 9(12) CCPRRR): While we think that the proposed list of the types of scenarios is in general complete, and it would allow CCPs to tailor them to their specificities/business model, we would caution against requiring every CCP to create at least one scenario for each of the seven types and rather suggest CCPs using the ESMA guidelines to flexibly tailor the scenarios to their specific risk profiles.
  6. Recovery plans indicators (Article 9(5) CCPRRR): While we appreciate the objective to ensure an integrated framework for the recovery plan indicators, scenarios and factors to be taken into account by the colleges when assessing recovery plans, we would generally caution against adopting a too prescriptive approach. EACH therefore suggests that indicators included in categories (a) and (c) should be made voluntary and, with particular reference to category (c) indicators, we believe they should refer to types of recovery measures instead of specific ones.
  7. Triggers for the use of Early Intervention Measures (Article 18(8) CCPRRR)): EACH broadly agrees with ESMA’s general comments on the draft Guidelines on triggers for the use of early intervention measures. We agree that national competent authorities (NCAs) should be in a position to investigate breaches and determine whether early intervention would be appropriate. However, we do not find that there is a clear distinction between BAU supervisory duties of NCAs and triggers i.e. the specific point in time at which an early intervention could be warranted.

For more information, please visit the EACH website www.eachccp.eu

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