Clearinghouse parent companies might have to pledge emergency aid, in EU bill

11 July 2017 10:19am
Euro coins

7 July 2017.  By John Rega

Clearinghouse parent companies such as Deutsche Börse could be forced to promise financial support for the clearing units in case of failure, under plans of EU governments to strengthen emergency preparations for markets.

The plans, outlined in a memo last month and obtained by MLex, relate to a bill on the recovery and resolution plans for clearing businesses, such as Deutsche Börse's Eurex Clearing.

Negotiators for the 28 EU governments are considering changes to the legislation, which aims to ensure that clearinghouses have financial buffers and emergency procedures in place, so that a collapse of the business wouldn't spark panic across the market. Clearinghouses manage risks for trillions of euros worth of derivatives and securities trades.

Delegations are discussing whether to require just-in-case recovery plans to cover the whole corporate group around a clearinghouse, not just the operational unit.

According to the memo on the talks, dated June 21, negotiators have already opted to demand that parent companies commit to offering emergency aid if needed to prevent a chaotic failure.

"Member states generally agreed that there should be a contractual agreement which should be legally binding for [a] parent company to provide financial support when [a clearinghouse] is part of the group," the document said.

In the example of Eurex Clearing, that could rope in the German stock market as well as the Clearstream settlement house and other affiliates within the Deutsche Börse group. The memo on the legislation doesn't name any names.

The precise requirements remain up for debate. While the governments generally have backed the idea, some officials have voiced concerns that a problem at a clearinghouse could infect other market infrastructure — such as Deutsche Börse's — that are part of the same corporate group.

London Stock Exchange Group's LCH.Clearnet is also covered by the proposal, although its UK operations could fall outside the bloc — with Brexit on track for March 2019 — before the clearinghouse legislation takes effect.

National negotiators have yet to agree on many other key elements of the proposal, such as how to divide responsibilities among the authorities in different countries that oversee a multinational provider.

Germany and Italy also have pushed to scale back the proposed powers for the European Securities and Markets Authority to mediate disputes between regulators. Their plan would call on ESMA only when emergency orders can find no majority support among regulators.

National negotiators also are still debating rules for use of public funds, under the proposal.

After national countries agree on a text, they would still need to negotiate with the European Parliament on a final form of the law.

Fintech Regulation in 2018