CCP approval and equivalence process drags on

There are still only 16 authorised CCPs (central counterparty clearing houses) in Europe. Each clearing house in Europe had to reapply for authorisation under EMIR (the European Market Infrastructure Regulation), as far more importance has been placed upon them by way of the global regulatory response to the financial crises.

The authorisation process commenced on 18 March 2014 when Nasdaq OMX Clearing, the Stockholm based CCP, became the first EMIR authorised CCP. The most recent authorisation was granted to Athex Clear on 22 January 2015. It remains the only CCP to have been authorised this year.

The big name missing from the list of approved European CCPs is ICE Clear Europe. Its approval remains caught up in the regulatory crossfire between Europe and the US (ICE Clear Europe is the London domiciled branch of US firm Intercontinental Exchange), with the two regulators yet to reach equivalence on the clearing framework of the other. The European regulator ESMA (the European Securities and Markets Authority) has reached equivalence with other jurisdictions including Australia, Hong Kong, Japan and Singapore.

ESMA has so far approved 10 CCPs from these jurisdictions, although it has received applications from at least 31 more including countries such as the US, Mexico, Korea and India. The list can be seen here: non-EU applicants to ESMA to be recognised as approved CCPs

ICE Clear Europe actually resubmitted its application to its local regulator, the Bank of England, in October 2014. It included a new margin calculation methodology and a story in the Financial Times at the time said that ICE expected to be authorised “at the end of this year or early next year.” It is now mid-July 2015 and there is no sign of ICE’s authorisation as yet.

ICE is still okay to offer clearing services in Europe, however, since it is a recognised clearing house under section 288 of the Financial Services and Markets Act 2000 supervised by the Bank of England. Until the new capital rules for Europe are implemented, clearing participants are okay to use ICE Clear Europe without facing onerous added capital charges to margin their activities.

Once the new capital rules are in place, it will be imperative for each CCP to be recognised by its local authority, and thus become a Qualified or QCCP. Failure to be recognised as a QCCP by the date of implementation of the new capital rules will render clearing at non-QCCPs prohibitively expensive.

This is why the new capital rules have been subject to continuous delay. They were due on 15 June 2014 and then delayed by six months, before being delayed again this April until 15 December 2015.

Even if that date is adhered to and a CCP does not achieve QCCP status, clearing participants in those CCPs will have three months grace period to connect to a QCCP. This is to prevent a panic situation where market participants with a clearing obligation have to suddenly disrupt their trading activity and find a QCCP.

Once equivalence is found between the European and US clearing regimes, these capital rules will be put into effect. Without equivalence, European listed instruments and derivatives would be subject to astronomical capital charges if cleared through US clearing houses. According to CME Group, which has CCPs in Europe and the US, it is thought that the capital charges could be as much as 30 times what they are now.

The attempt to become a QCCP, however, has also created something of an imbalance in Europe. As we have seen, ICE Clear is regulated according to the Financial Services and Markets Act of 2000, whereas the 16 QCCPs in Europe are subject to EMIR rules.

The sooner equivalence is sought; the sooner there will be a level playing field in Europe. The sooner the clearing landscape, on a more global level, will be settled too. 

Tags: CCPsClearingEuropeRegulationUSESMAEMIRICENASDAQ OMXCMEBank of England