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ESMA to IOSCO – sorry, the dog ate my homework

ESMA has issued a short paper containing Guidelines and Recommendations regarding national authorities’ implementation of the CPSS-IOSCO Principles for Market Infrastructure (PFMIs) in respect of Art. 22(1) EMIR- supervision of CCPs. In a belated realisation that the “operative language” of EMIR is not fully consonant with that of the PFMIs, ESMA has rushed out a guideline that pays due deference to IOSCO. The guideline will not be subject to public consultation, insofar as it is only addressed to competent authorities, and ESMA has left it too late. The EU is currently undergoing an assessment by IOSCO of its PFMI implementation, in “a matter of weeks” it will be graded for consistency on each of the 22 Principles and 106 Key Considerations applicable to CCPs- a bright spark at ESMA has realised that the EU is in imminent danger of failing. ESMA recognises that this would be an “unfortunate outcome” which may result in “serious consequences for CCPs established in the EU”. If the EU were to fail its assessment, 3rd country banks would have to hold additional capital against their EU CCP exposure- a risk weighting of 1250% to their default fund contributions and a doubling of CCP trade exposures from 2% to 4%. Dependent on 3rd country rules, EU CCPs may also be barred from offering their services in particular countries. At least in terms of EU CCP competitive advantage, “serious considerations” is something of an understatement, representing material consequences from a minor mismatch in “operative language”.

ESMA believe that the adoption of “Guideline and Recommendation One” will smooth any potentially ruffled feathers-

“EMIR and the regulatory and implementing technical standards made under it establish requirements which are consistent with the Principles for Financial Market Infrastructures published by the Committee on Payment and Settlement Systems and the Board of the International Organization of Securities Commissions (PFMIs). When carrying out the duties resulting from EMIR for the authorisation and supervision of CCPs, competent authorities should ensure that CCPs established in their territory comply with these requirements in accordance with the PFMIs and operate in a manner that is consistent with them.”

In reality, the above represents a small technical addition, realigning the letter of the law with its spirit. However, PFMI consonance is not a minor detail and ESMA is already no stranger to “last minute legislation”; given the magnitude of the tasks it faces this year alone, it is to be hoped that the above represents another anomaly rather than a new modus operandi.

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