The European Association of CCP Clearing Houses (EACH) has called for a robust and efficient approach to approve central counterparty (CCP) products, services and risk models in response to the European Securities and Markets Authority (ESMA) consultation on the European Market Infrastructure Regulation (EMIR) article 15 and article 49.
ESMA’s consultation paper covered the technical standards on conditions which require an extension of authorisation for a CCP, conditions which require validations of a CCP’s changes to models and parameters by the national competent authority (NCA) and ESMA and the procedure for consulting the college on whether or not those conditions are met.
One concern raised in EACH’s response was the complexity of ESMA’s proposed approach.
It was suggested that the proposed process would not improve the existing one and would “unnecessarily increase complexity and duration of the processes of extending services and activities (Article 15) and the approval of model and parameter changes (Article 49)”.
EACH also found the structure of incentives problematic, stating: “The elongated and complex model governance procedures suggested by the draft ESMA RTS may increase the contradictory outcomes to those initially intended that are already being experienced in some cases.”
According to the association, the cost-benefit assessment of maintaining the modelling framework at the state-of-the-art, and keeping parameters up-to-date for prevailing market conditions, are not so simple any more.
Additional concerns were raised around ‘accountability versus responsibility’. EACH noted and appreciated the accountability of ESMA and the relevant colleges when it comes to CCP supervision. However, it said that the steps proposed in this consultation represent a move by authorities from accountability to responsibility.
“Accountability and responsibility should not be confused,” EACH highlighted.
CCPs are responsible for the day-to-day management of their models, and the suggested text by the draft ESMA regulatory technical standards seems to preclude the execution of such a role, EACH observed.
“Regulators, complementarily, have the important role of overseeing those practices, using legislation to establish the boundaries of appropriate action,” the association added.
Meanwhile, allocation of responsibility and the level playing field was another concern with the association explaining the proposed transfer of responsibilities from the NCAs to ESMA and respective colleges could imply that the level of context and information is reduced during the decision-making process.
EACH highlighted: “Furthermore, an additional consultation which might lead to unlevel playing field between CCPs and the governing processes applied due to potentially not always consistent decisions and unified practices.”
The decrease of possibilities for risk management was also an area of concern with EACH suggesting the proposed approach unnecessarily increases ‘time-to-market' of new risk products, services and changes to risk models, without particular governance and crucially, without any defined timing.
“The proposed approach could significantly (or even in some extreme cases indefinitely) postpone the approval of new products,” it noted.
EACH explained: “This would have the paradoxical consequence of decreasing, rather than increasing the possibilities to enhance risk management at CCPs, inhibiting the offering and quality of risk management products to the market.”
Also in its response, EACH outlined governance of the proposed approach as an issue explained that the consultation paper does not include any governance to operate the new processes.
There is no definition of the new timeline for the process of determining whether an extension of activities or services is subject to Article 15 and whether a change to the models and parameters is significant in line with Article 49.
“We believe that in line with the EMIR provisions, a specific and efficient timeline must be developed and most importantly enforced. Limiting the amount of time necessary for launching new services is key to spur innovation and competition within the EU, but also on global markets where EU CCPs enter into competition with CCPs from other jurisdictions which may benefit from faster processes,” EACH concluded.
