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EU’s first step towards gross margin for CCPs

On 2 October 2015, ESMA published the non-confidential replies to its Discussion Paper – Review of Article 26 of the RTS on requirements for central counterparties (No 153/2013). The paper[1] focused on the timing necessary for a CCP and the level of margins available at CCP level to complete the transfer or liquidation of the client positions of a defaulting clearing member.

The key suggestion was to move from a two-day liquidation period for products other than OTC derivatives (e.g. listed derivatives) to a one-day liquidation period in alignment with the US approach, together with a switch from a net to a gross account structure.

In a net account structure, the clearing member only passes through to the CCP the net exposure across a set of clients, thereby retaining much of the client margin. In a gross account structure, the margins are posted in full to the CCP.

Nearly all respondents were supportive of the gross margin model. Conversely, the drop to a one-day liquidation period met strong resistance as it could directly compromise the liquidation of the positions, or a successful porting.

Only one respondent[2] questioned the assumption that portability is easier to achieve with an ISA rather than with an OSA account, although collectively the respondents raised a large number of issues in relation with porting in the EU. To ensure effective porting might require a root and branch overhaul.

The proposal of “guaranteed portability” by way of pre-existing mandatory arrangement was firmly rejected. Among other red flags, the backup clearing members would potentially be exposed to costly capital requirements: the not yet ported client positions might count as contingent obligation in the leverage ratio calculations.

Overall, it is clear that further consideration of the matters raised in the Discussion Paper is required.

What is equally clear is that the market is growing impatient about the equivalence decision of the US CCPs[3]. Although ESMA explicitly stated that the discussion would be “without prejudice to the outcome of the European Commission analysis on the equivalence of the legal and supervisory regime for CCPs in the USA”, it is no secret that the matters raised in the paper represented nothing less than the critical difference between the two regimes.

The EU recast of the core RTS on CCPs should not cause further delay to reach an equivalence decision regarding the US CCPs.

Yet, in a next step ESMA might prepare a revised technical standard to be included in a consultation paper.

[1] Discussed here: Porting to backup clearing member: an unbreakable pact?

[2] See reply from CME. Other respondents suggested ISA accounts are easier to port, for instance EACH and Eurex

[3] Discussed here: EU CCP Capital “zombieline” staggers on 

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