Shearman & Sterling LLP | FinReg | European Commission Publishes Draft Delegated Regulations on Criteria for Tiering of Third-Country CCPs and on Comparable Compliance
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  • European Commission Publishes Draft Delegated Regulations on Criteria for Tiering of Third-Country CCPs and on Comparable Compliance

    The European Commission has published two draft delegated regulations, the first is on the criteria for determining whether a third-country CCP is systemically important and the second is on the minimum elements to be assessed by the European Securities and Markets Authority when assessing third-country CCPs’ requests for comparable compliance and the modalities and conditions of that assessment. The draft regulations will supplement the European Market Infrastructure Regulation. EMIR was revised twice during 2019.  The second revision (known as EMIR 2.2) introduced changes to the procedures and authorities involved in the authorization of CCPs and the requirements for the recognition of third-country CCPs. “EMIR 2.2” is part of the EU’s push to enhance the regulation of CCPs amid concerns regarding potential CCP failures given their increasing systemic importance and is widely regarded as a direct response to Brexit, given that three of the largest European CCPs are based in the U.K. Feedback on the draft delegated regulations can be submitted until July 9, 2020.

    EMIR 2.2 introduced a two-tier system for the regulation of third-country CCPs, whereby ESMA will categorize each CCP as either a non-systemically important CCP (Tier 1 CCP) or a systemically important CCP (Tier 2 CCP). Tier 1 CCPs will continue to operate under EMIR’s existing equivalence framework. CCPs in Tier 2 must comply with a more exacting set of standards, under a new test known as "comparability", which goes further than the existing "equivalence" concept, both in its call for closer alignment and specific enforcement powers for breaches. EMIR 2.2 sets out the criteria that ESMA must take into account when deciding to which tier a third-country CCP belongs (so-called, "tiering").  The first Commission draft delegated regulation will specify in further detail those conditions.  The second draft delegated regulation sets out the minimum elements that ESMA must consider when assessing comparable compliance.

    The Commission has taken on board very little of ESMA’s technical advice, and effectively rebuked ESMA for attempting to legislate so widely to expand its powers and remit, attempting to subject third country CCPs to higher levels of regulatory reporting and information provision than EU CCPs, and its attempted power-grab towards placing discretion in ESMA's hands as to which CCPs to place in Tier 2.  The Commission's draft delegated regulation seeks to be more proportional, transparent and predicable. In particular, it establishes a new de minimis test based upon quantitative thresholds, which aims at taking many third country CCPs out of ESMA's tiering assessments entirely (whilst ESMA would have subjected all third-country CCPs globally to onerous information production processes).  The Commission has also deleted swathes of text elucidating in-scope information (related to information-gathering powers) which ESMA could demand from third country CCPs and promulgated new comparability requirements, requiring ESMA to rely in the first instance on published information and existing assessments by CCPs of their compliance with the IOSCO standards.  The new comparability requirements are of particular and broader interest in that, instead of involving a line by line literal assessment by ESMA of whether EMIR (and its technical standards) have been enacted literally into third-country laws (as proposed by ESMA), the comparability requirements have been drafted as a set of high level principles, summarising key principles of EMIR, which third country CCPs must satisfy.

    Many commentators have noted that EMIR 2.2 is likely to be the model for third country relationships going forwards under other EU financial regulation directives and regulations, to address concerns related to Brexit.  Notably, the Commission's approach features almost all of the same fundamentals of the "expanded equivalence" model that the U.K. Government had proposed for the future relationship between the EU and the U.K.. Enhanced equivalence was originally developed by Shearman & Sterling partner, Barnabas Reynolds, including in his books, A Template for Enhanced Equivalence and EU-UK Financial Services After Brexit Enhanced Equivalence - A Win-Win Proposition.

    The draft text of these draft delegated regulations may change before the Commission adopts its final versions, and those versions will be subject to approval by the European Parliament and the Council of the European Union.

    The Commission has also published for feedback a draft delegated regulation on the fees ESMA may charge third-country CCPs for the tasks its undertakes, such as assessing recognition applications.

    View the draft delegated regulation on criteria for determining whether a third-country CCP is systemically important.

    View the draft delegated regulation on comparable compliance.

    View details of the draft delegated regulation on fees charged to third-country CCPs

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