Shearman & Sterling LLP | FinReg | EU Council Adopts Laws on Enhanced Supervision of Third-Country CCPs 
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  • EU Council Adopts Laws on Enhanced Supervision of Third-Country CCPs 
    The Council of the European Union has adopted the amendments to EU law on CCP supervision. The adopted laws revising the European Market Infrastructure Regulation (EMIR 2.2) will change how both EU CCPs and third-country CCPs are supervised, and implement into legislation the controversial EU "location policy" for the largest third-country CCPs. According to the Council's press release, EMIR 2.2 is scheduled to be published in the Official Journal of the European Union on December 12, 2019 and would come into force 20 days later. The legislative process relevant to EMIR 2.2 has taken place with the U.K. exit from the European Union in the background and many of the changes relevant to third-country CCPs are effectively a response to the U.K.'s decision to leave the EU, given that two of the three largest European Union clearing houses are U.K.-based.

    Third-country CCPs

    1. Tier 1 and Tier 2 CCPs

    EMIR 2.2 will introduce a two-tier system for third-country CCPs whereby the European Securities and Markets Authority will categorize each CCP as either a non-systemically important CCP (Tier 1 CCP) or as systemically important CCP (Tier 2 CCP). Tier 1 CCPs will continue to operate under EMIR's existing equivalence framework. This requires a determination by the European Commission that:
    • the legal and supervisory arrangements of a third country ensure that CCPs in that country comply with requirements equivalent to those in EMIR, including requirements on governance, risk committees and CCP ownership;
    • those CCPs are subject to effective supervision and enforcement in that third country; and
    • the legal framework of that third country provides for an equivalent third-country CCP recognition regime.

    The Commission will be able, if necessary, to specify further the criteria for assessing the equivalence of third-country CCP frameworks. The Commission's equivalence decision-making powers will also be extended to setting conditions to ensure that: (i) the equivalence criteria continue to be fulfilled on an ongoing basis; and (ii) ESMA can exercise its supervisory powers over third-country CCPs.

    Tier 2 CCPs will be subject to additional requirements, most notably a more exacting, line-by-line assessment of the prudential, conduct of business, governance and margin requirements that are applicable to EU CCPs. A Tier 2 CCP may request that “comparable compliance” be applied by submitting the factual basis for a finding of comparability and how the CCP satisfies EMIR's requirements. ESMA will assess whether the CCP's compliance with its third-country framework satisfies the relevant EMIR requirements. The Commission must adopt legislation specifying the minimum elements that ESMA should assess in making a comparable compliance determination and the modalities and conditions to carry out that assessment.

    2. Criteria for determining tier categorization

    EMIR 2.2 sets out the criteria that ESMA must take into account when deciding to which tier a third-country CCP belongs. These criteria will be supplemented by a Commission delegated act. ESMA has consulted on draft technical advice to the Commission to assist in preparing this act and the act relating to ESMA's comparable compliance assessment. ESMA stated in those consultation papers that it intended to publish the final version of the technical advice by the end of 2019. ESMA's powers to make determinations as to the systemic importance of a third-country CCP or to undertake a comparable compliance assessment will not come into effect until the relevant delegated acts enter into force.

    3. Supervisory powers, fines and penalties

    ESMA will have the ability to impose fines upon Tier 1 and Tier 2 CCPs that have, either intentionally or negligently, infringed EMIR by providing incorrect or misleading information to ESMA or, in the case of Tier 2 CCPs, have infringed any other requirements applicable to them under EMIR. Fines will be imposed in accordance with the seriousness of the infringement, using a two-step methodology: a “basic” amount that will take into account the annual turnover of the CCP concerned; and an adjustment to increase or decrease that amount using coefficients linked to aggravating or mitigating circumstances.  In a last minute change to the legislation text, where a CCP operates under a comparability framework which has been assessed positively by ESMA but is not identical to EU law, it could not be fined.

    ESMA will also be able to conduct investigations and carry out on-site inspections of Tier 2 CCPs and any third party to whom a Tier 2 CCP has outsourced operational functions, services or activities. To compel third-country CCPs to halt an infringement, provide information or submit to an investigation or on-site inspection, ESMA will also be able to impose periodic penalty payments.

    4. Relocation

    Under EMIR 2.2 ESMA may determine that a Tier 2 CCP is, or some of the clearing services it provides are, too systemically important to the financial stability of the EU or one of its member states to allow it to continue to provide such services from outside the EU on the basis of an equivalence or comparability arrangement. The Commission will be empowered to adopt an implementing act stating that the third-country CCP cannot provide some or all of its clearing services to EU trading venues and clearing members unless it establishes itself in the EU and becomes subject to direct supervision in the EU as an EU CCP. This implements the controversial “location policy”, which the EU previously failed to implement via policy-making when this was ruled ultra vires by the European Court of Justice (United Kingdom of Great Britain and Northern Ireland v European Central Bank (ECB) Case T-496/11).

    Supervision and colleges

    ESMA's supervisory role will be enhanced through the introduction of a new ESMA committee, the CCP Supervisory Committee. The CCP Supervisory Committee will be responsible for ensuring consistent supervision across the EU of both EU and third-country CCPs, particularly where there is a cross-border aspect. The Committee will have the ability to issue opinions in certain circumstances on the proposed decisions of national regulators of EU CCPs, which the national regulator will need to take into account. The Committee will prepare the draft decisions relating to third-country CCPs for approval by ESMA's Board of Supervisors.

    EMIR 2.2 also amends the provisions governing the constitution of the supervisory colleges that determine compliance of CCPs with relevant EMIR requirements. The European Central Bank will now be included within colleges where it is the competent authority responsible for the supervision of a CCP's clearing members. The ECB will have two votes where it is part of the college as a central bank of issue and as the competent authority of a clearing member.

    A college's role will be enhanced by giving it the power to provide opinions on certain supervisory areas impacting a CCP's business operations, including the assessment of shareholders and the outsourcing of operational functions, services or activities. A college will also be able to make recommendations for addressing risk management inadequacies and for improving a CCPs' resilience. The national regulator will be obliged to consider any such opinion or recommendation. To improve transparency of the colleges, the composition of a CCP's college must be publicly published.

    View the Council's press release.

    View the adopted version of EMIR 2.2.

    View details of ESMA's consultation on technical advice.

    View the judgement in the UK v ECB case.

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