ESMA`s latest consultation on indirect clearing arrangements under EMIR and MiFIR closed on 17 December 2015. The absence of consensus on the majority of issues is evidenced by the large number of disparate responses received from participants up and down the clearing chain.

In particular, a stark criticism is that the twin RTS on indirect clearing fail to meet their fundamental purpose. Indirect clearing should help participants with a low volume of cleared transactions to meet their clearing obligation, but the EMIR experience showed prospective indirect clearers were unwilling to take on indirect clients[1]. In the eye of this storm, it is possible to discern a relative calm concerning the limited role of CCPs.

Under the original EMIR RTS, CCPs face limited duties:

• Avoid business practices which act as a barrier to establishment of indirect clearing arrangements on reasonable commercial terms;
• Maintain separate records and accounts enabling each client to distinguish in accounts held with the CCP between the assets and positions of the client and those held for the accounts of the indirect clients of the client; and
• Identify, monitor and manage any material risks arising from indirect clearing arrangements.

Currently, certain major CCPs such as LCH.Clearnet Limited and CME Clearing Europe include provisions on indirect clearing in their rulebook[2].

LCH.Clearnet Limited allows a clearing member to maintain separate records and accounts enabling a client to distinguish its assets and positions from those of its indirect clearing clients. An indirect omnibus segregated account for indirect clearing clients is opened as a sub-account in the individual segregated account of the client. The rulebook contains provisions on client to client porting and porting to the relevant clearing member. In the latter, the indirect client would become a direct client. In certain circumstances, the relevant contracts could be transferred to the house account of the clearing member. The rulebook prescribes specific language to be incorporated in the agreement between the client and its indirect clients.

CME Clearing Europe Limited allows client accounts to be established as indirect client accounts in relation to indirect client clearing services. In the event of a default by the client, the CCP will facilitate the transfer of an indirect account to a different client or clearing member.

New requirements for the CCPs

 

ESMA proposes to lay down additional requirements for CCPs in both the revised EMIR RTS and the new MiFIR RTS. The consultation envisions a minimum of two account structures to be made available at the CCP level and all the way down the chain: the omnibus indirect account (NOSA) and the gross omnibus indirect account (GOSA).

Where a client manages the assets and positions of several indirect clients in a single GOSA account, the CCP would be required to calculate margin requirements separately for each indirect client based on the position and collateral information relayed by the clearing member.

A number of stakeholders sought to dispel doubts on a possibly unintended reading of the RTS, according to which a clearing member would open a separate NOSA and/GOSA at the CCP for holding the assets and positions of the indirect clients of each client in the clearing chain. This would lead to an exponential proliferation of accounts.

A less account-intensive alternative has received broad industry support. FIA Europe and the European Association of CCP Clearing Houses (EACH) have indicated a strong preference for a single account of each type per clearing member to hold all indirect client positions. Simply put, each level of the clearing chain would allow a distinction between its clients and the clients of its clients, but limited to one level down. Such an approach would be closer to what is already proposed by certain CCPs.

With the availability of indirect clearing at stake, the consultation might be viewed as a necessary opportunity to facilitate indirect clearing arrangements. Clearing members, clients and indirect clients are those principally concerned, as the types of accounts available at the CCPs and their standardisation will provide the general framework for the indirect clearing arrangements[3].

[1] In its reply to the consultation, UBS reports that “For several years now, the industry has collectively been working to devise a commercially viable approach to offering indirect clearing requirements for OTC derivatives that is compliant with the requirements under EMIR. But as of today, no solution has been found, and no OTC derivatives indirect clearing offerings are available.”

[2] Rulebooks of LCH.Clearnet Limited and CME Clearing Europe Limited as of 27 January 2016. Rulebooks are updated frequently.

[3] For further discussion on documentation of indirect clearing arrangements, see Indirect Clearing: In Search of One Template To Rule Them All

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