The European Securities and Markets Authority (ESMA) has issued today it’s final report on systemic risk and cost implications of interoperable arrangements between central clearing houses (CCPs) established under the European Market Infrastructure Regulation (EMIR). The report is available here.
The European Securities and Markets Authority (ESMA) is publishing this report pursuant to Article 85(4) of Regulation (EU) 648/2012 of the European Parliament and Council on OTC derivatives, central counter-parties and trade repositories (EMIR) which provides that the European Commission (EC) shall, in cooperation with the Member States and ESMA, and after requesting the assessment of the ESRB, draw-up an annual report assessing any possible systemic risk and cost implications of interoperability arrangements focussing at least on the number and complexities of the arrangements and the adequacy of risk management systems and models. This report is also to be submitted to the Council and the Parliament.
First this report details how the concept of interoperability has emerged in the EU and the general EU regulatory framework applicable to it as described in Title V of EMIR and in the Guidelines and Recommendations for establishing consistent, efficient and effective assessments of interoperability arrangements1 (the Guidelines and Recommendations).
Then it provides a mapping and a description of the current interoperability arrangements between EU CCPs for different product types i.e. EU equities, EU government bonds and EU Exchange Traded Derivatives (ETDs).
Further an assessment of the benefits and impacts on costs for the relevant parties is included. Finally the last section is dedicated to the prudential analysis at CCP level and the risk management tools used to mitigate the potential risks arising from interoperability, including some quantitative data. The key risk under consideration is the counter-party credit risk resulting from exposures between interoperable CCPs. Whilst there are scenarios under which under-collateralisation can materialise, EMIR and ESMA Guidelines and Recommendations address how these cases should be catered for via inter-CCP arrangements. Along those lines, the evidence collected on the current CCP practices show that EU CCPs have set-up mechanisms to adequately mitigate potential risk of under-collateralisation, even in cases where re-use is permitted.
This report is being submitted to the EC and is expected to feed into the report on any possible systemic risk and cost implications of interoperability arrangements that the European Commission shall prepare and submit to the European Parliament and the Council.