European Commission proposes tighter supervision of third-country clearinghouses
On June 13, the European Commission issued a proposal to achieve "more robust supervision" of central counterparties by amending the European Market Infrastructure Regulation. One section of the proposal would establish a more rigorous system of supervision for third-country CCPs that are systemically important to the European Union's financial markets, and would give European regulators the authority to require these CCPs to relocate into the EU if the additional supervision is deemed to be "insufficient to mitigate the potential risks." The Commission explained that the proposed reforms are needed to address the increasing systemic importance of CCPs as well as the withdrawal of the U.K. from the European Union.
The proposed relocation policy has sparked controversy among European regulators. On July 6, Andrew Bailey, chief executive of the U.K.’s Financial Conduct Authority, stressed the importance of preserving open markets, freedom of location and free trade in the post-Brexit environment. In this vein he expressed his preference for an international agreement regarding equivalence and regulatory co-operation as opposed to a location based policy. In contrast, the European Central Bank published a report on the international role of the euro in which it reiterates the necessity of the proposal on enhanced supervision of CCPs to ensure the “safety and stability of the financial system and preserve the role of the Euro-system as the central bank of issue”.
In September, Chris Giancarlo, the chairman of the U.S. Commodity Futures Trading Commission, waded into the debate. During a week-long trip to Europe, he gave a series of speeches and statements defending the agreement on cross-border oversight of clearinghouses that was finalized by the U.S. and the EU in 2016. Giancarlo urged EU policymakers to take a "cooperative and global approach" to regulating derivatives markets and emphasized that the "optimal approach" for cross-border regulation of clearinghouses is for regulators to give deference to each other.
"The challenge of cross-border supervision of large cross-border CCPs is a true test as to whether U.S. and European authorities are serious about regulatory coordination," Giancarlo said in a Sept. 14 speech to a large audience of EU policymakers at the annual Eurofi conference. "Without such coordination, overlapping regulatory burdens, inconsistencies, and legal uncertainty will very likely threaten the financial stability of our markets, dampen our prosperity and reverse the progress we have made since the 2008 financial crisis." FIA also has taken a position on the issue. In June, FIA sent a letter to EC Vice President Valdis Dombrovskis cautioning against the forced relocation of clearing, and on Sept. 7, FIA reiterated those concerns in a letter to the European Commission.
FIA expressed support for the goal of enhanced supervision, and suggested more than 20 actions that could achieve this goal without requiring relocation of clearing.
“We support the EC’s commitment to ensuring third country CCPs are appropriately supervised as part of a well-regulated central clearing system,” said Walt Lukken, president and CEO of FIA. “However, forced relocation of clearing could distort markets, fragment liquidity, and raise costs for market participants globally. The EC can better achieve the goal of improving the oversight of third country CCPs by updating its proven equivalence regime and enhancing the supervision for CCPs that are systemically important in the EU.”
