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FMLC asks for indirect clearing direction

The Financial Markets Law Committee (FMLC) has published a paper detailing its concerns over the Article 30(2) MiFIR indirect clearing mandate. Article 30 MiFIR allows access to a CCP by a “client of a client of a clearing member” (indirect client). While the RTS still languishes in draft form, pending possible adjustments to the EMIR RTS, the FMLC has examined Article 4(7) of Draft RTS 38. The section requires a clearing member to establish procedures for client default including “ steps…to initiate the return of the liquidation proceeds to the indirect client”. In the event of direct client default, the effect of the provision is to require a clearing member to make “ leapfrog payments” of collateral to the indirect client.

The obligation raises potential conflict with current insolvency laws of both Member States and third countries. Recital 5 of Draft RTS 38 confers primacy to MiFIR over contrary Member State law; however the legitimacy of this assertion is untested, Level 1 text has the requisite authority to override, it is open to question whether this extends to Level 2 text. Citing basic UK insolvency law, the FMLC notes that mandatory leapfrog payments would conflict with the pari passu principle and the related anti-depravation principle. Section 239 of the Insolvency Act 1986 allows legal challenge to pre-default elections that result in inequality among creditors. Section 127(1) provides that any disposition of property made after commencement of the winding up be declared void. Section 238 (4) permits legal challenge to any undervalue transaction made by a company in the two years prior to insolvency. The FMLC requests clarity as to possible exceptions to the obligations and suggests that they might include conflicts with national insolvency laws.

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