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'Active account' requirement for clearing rules revamp divides EU countries in initial talks
06 March 2023 16:07 by Kathryn Carlson
EU governments are split in initial negotiations for the bloc's revamp of its clearing rules over the "active account" requirement, eligibility of collateral amid energy market volatility, and reporting requirements for intragroup transactions, MLex understands.
Member states’ concerns are laid out in several documents, seen by MLex, that were prepared for a meeting of national experts on Tuesday and Wednesday to discuss the revamp of the European Market Infrastructure Regulation, or EMIR 3.0.
Under the European Commission’s proposal, published in December, an "active account" at an EU clearinghouse will be mandatory for “a portion of certain systemic derivative contracts" — effectively dragging a proportion of clearing operations away from the dominant UK post-Brexit and forcing them to take place in the EU instead.
Negotiations on the proposal are getting under way, with the European Parliament nominating its leading lawmaker for the proposal, Danuta Hübner from the center-right European People’s Party group, last month.
Under the commission proposal, the "active account" requirement will apply to over-the-counter interest-rate derivatives in euro and Polish zloty, credit default swaps in euro and short-term interest-rate derivatives in euro.
This means that a yet-to-be-defined proportion of those transactions will need to be cleared at EU clearinghouses instead of UK ones in the future.
Investment industry lobbies have argued against the requirement.
The key issue is not so much the requirement to hold an EU clearinghouse account — the commission estimates that 60 to 80 percent of EU clients for the contracts in question already hold accounts at EU clearinghouses — but the level of activity that will be legally required in those accounts, which is yet to be decided.
“A few” EU countries have raised concerns about this requirement, according to one paper written by Swedish officials chairing talks.
In theory, the requirement should address the financial stability risks of having swathes of EU transactions cleared at non-EU clearinghouses, mostly in the UK.
According to the paper, the countries have asked “if the active account requirement is the right tool to address these financial stability risks,” pointing to the “possible consequences of such a proposal for the competitiveness of European market players.”
Some countries have also raised concerns about which financial instruments will be subject to the requirement, the legal basis for determining its scope, and potential exemptions, the Swedish paper said.
Some countries are pushing for exemptions on activities such as “market making” and clearing for non-EU clients, given their “potential impact on EU clearing members’ competitiveness,” the paper added.
The commission responds to these concerns in its own paper, also drafted for this week’s meeting and seen by MLex.
In that paper, it says markets regulator, the European Securities and Markets Authorit,y will need to “take into account certain aspects, including the competitiveness of EU firms,” when it calculates the proportion of activity which will be required in the ‘active account’.
On clearing conducted by EU clearing members on behalf of non-EU clients, the commission paper says it does not plan to “impose” a requirement for non-EU client trades to be cleared at an EU clearinghouse.
The commission paper also clarified that the "active account" requirement would only apply to new contracts, and can only apply if an offer to clear the same contracts exists in the EU.
Certain contracts subject to the requirement could also see “different sub-categories” with different levels of activity required, the commission paper said. It added that “potentially” the level of activity for “certain sub-categories” could be set at zero “if appropriate” — effectively laying the groundwork for exemptions.
The rollout of the requirement will also be “sufficiently flexible” to allow different phase-in dates for different types of product subject to the ‘active account’ requirement, the commission paper said.
The commission’s proposal included changes to the type of collateral that can be accepted for clearing, after volatile energy markets sent margins and collateral requirements soaring and left firms affected by the energy crisis at risk of not being able to meet the requirements.
Under the changes, bank guarantees and public guarantees would be acceptable as collateral, with bank guarantees allowed for both financial and non-financial counterparties.
At the time, securities supervisor ESMA and energy exchanges lobby Europex warned the commission not to shift risk from the energy sector to the finance sector in its interventions.
Some countries seem to agree with them. The Swedish paper states that some countries are “hesitant” about the plan, “given the interconnectedness of the financial system”, while “several” countries “stress the potential risks” to other market players and sectors of the economy if the collateral changes were to be made permanent.
The commission’s move to remove an exemption from a reporting requirement for transactions within a corporate group was always set to be controversial.
Large companies want to preserve the exemption, which means the information doesn't need to be disclosed for certain transactions that take place in different parts of the same large company — for instance, an international furniture chain hedging on commodity derivatives to avoid volatility in the price of its wood supply.
The Swedish paper says that “some” countries support the removal of the exemption, but “several” question the removal and have raised “potential significant effects and additional costs” around hedging if it is removed.
Because of the need for a clearer picture and more effective supervision of the risks involved in these transactions, countries have pushed for a cost-benefit analysis on lifting the exemption, the Swedish paper says.
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