Shearman & Sterling LLP | FinReg | Council of the European Union Publishes Working Paper on Interoperability Arrangements and MiFIR Open Access for Exchange Traded Derivatives
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  • Council of the European Union Publishes Working Paper on Interoperability Arrangements and MiFIR Open Access for Exchange Traded Derivatives

    The Council of the European Union has published a working paper on interoperability arrangements as a source of contagion risk and open access provisions for exchange-traded derivatives under the Markets in Financial Instruments Regulation.

    Interoperability arrangements are links between CCPs that involve the cross-system execution of transactions. They are relevant where multiple CCPs service the same trading venue and allow clearing members of one CCP to centrally clear trades carried out with members of another CCP, without requiring the first counterparty to be a member of the second CCP. The European Market Infrastructure Regulation contains provisions governing CCP interoperability arrangements, including the need for non-discriminatory access, adequate risk management policies and the need for prior approval of relevant national regulators. A key motivation for interoperability arrangements is the reduction of fragmentation in the open positions of trading participants and/or clearing members, as open positions in the same products can be consolidated at one CCP. The European Systemic Risk Board published a report on interoperability arrangements in January 2019, in which it raised concerns about the lack of EU regulation governing how interoperability arrangements would be treated in recovery and resolution. The Council's Working Paper picks up on the ESRB's concerns and its proposals that specific provisions should be introduced preventing CCPs or their resolution authorities from imposing tools or actions on interoperable CCPs that the CCPs would not be able to meet without themselves entering into resolution. The Council is seeking Member States' views on two particular aspects of the ESRB's proposals. Firstly, the Council seeks input on the proposal to carve out interoperable CCPs from the application of recovery or resolution actions from the EU's proposed CCP Recovery and Resolution Regulation, where these would automatically cause the interoperable CCP to invoke recovery or resolution powers in order to address such actions. Secondly, the Council asks whether Member States believe that the introduction of a review clause, enabling a targeted future review on how best to handle interoperable arrangements, should be foreseen, and whether this should be a substitute for, or complement to, the ESRB's other proposals.

    The concerns around interoperability arrangements are linked to the second part of the Council's Working Paper on MiFIR open access provisions. MiFIR requires a trading venue to provide open and non-discriminatory access to a CCP so that a CCP can clear trades in transferable securities, money market instruments and ETDs concluded on a trading venue of their choice, which will in turn allow the members of a trading venue to select the CCP they wish to use for clearing. There is a reciprocal requirement on CCPs to provide open and non-discriminatory access to a trading venue that wishes to clear financial instruments through a particular CCP. One consequence of this policy may be the creation of new links between CCPs that service the same trading venue. Those links are likely to be through interoperability arrangements.

    View details of the ESRB's report on interoperability arrangements.

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