ECB response to the European Commission’s consultation on the review of the European Market Infrastructure Regulation (EMIR)

—  Executive Summary —

The ECB welcomes the opportunity to provide its views on the review of EMIR. While it should be recognised that many EMIR requirements have been in force for only a limited period of time, and that others have not yet entered into force, the ECB believes that certain important conclusions can already be drawn. This response puts forward the ECB’s proposals for a future revision of the Regulation, with the main points in this regard summarised below.

As a general point, it is recalled that international standard-setting bodies (namely the Committee on Payments and Market Infrastructures (CPMI), the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board) are currently undertaking significant work on the standardisation of central counterparty (CCP) requirements to foster international convergence and identify whether additional guidance is required. The inclusion of any additional requirements in EMIR should, therefore, be consistent with the outcome of this work.

Regarding the impact of the Regulation on non-financial counterparties (NFCs), the ECB recommends that the question of the use of, or access to, over-the-counter (OTC) derivatives by NFCs be studied further, and mitigants identified if the views expressed by a number of market participants are confirmed, i.e. that the current framework causes specific undue restrictions on NFCs accessing the OTC derivatives market to support their regular business.

The ECB believes that the collegial supervisory process for CCPs is a key feature of the EMIR framework. However, it is concerned that authorities are not always being provided with sufficient time to fully assess the proposals for extensions of services or significant model changes put forward by CCPs, and has accordingly suggested adjusting the timeline for delivering college joint opinions. Moreover, it is the opinion of the ECB that the procedure for approving significant changes to CCP risk management (including the criteria for identifying significant changes) under Article 49 EMIR could be further specified. In addition, the ECB strongly believes the Regulation should be revised to reflect the specific role of the Single Supervisory Mechanism (SSM).

Regarding margin requirements, the ECB recognises that little evidence of excessive procyclicality has been observed during the relatively short time-span over which EMIR has been in force. Nonetheless, and taking a forward-looking approach, the ECB proposes further enhancing the requirements for mitigating procyclicality. Potential avenues to explore include enhancing the transparency (predictability) and flexibility of margin frameworks, and ensuring margin methodologies directly account for the economic or financial cycle. The ECB also supports the inclusion of macro-prudential intervention tools in EMIR, in order to prevent the build-up of systemic risk resulting, in particular, from excessive leverage, and to further limit the procyclicality of margins and haircuts. Such tools, however, would be applied at transaction level and not at CCP level, after due consultation between relevant EU authorities.

On the issue of margining models, the ECB recommends additional requirements which would guarantee the resilience of portfolio margining models in times of stress. For example, the ECB would favour more granular requirements regarding the reliability and robustness of correlations, and the disclosure of the underlying economic rationale justifying such correlations.

The ECB recommends clarifying the definitions and scope of EMIR. In order to ensure that central banks can continue to perform their statutory tasks effectively, it is important that central bank transactions are fully exempt from the reporting obligations. This is also relevant with regard to the exemption for European System of Central Banks (ESCB) members from other provisions of EMIR, such as the exemption from the clearing obligation and from risk-mitigation techniques. While the European Securities and Markets Authority (ESMA) has provided clarification in its Q&A document that ESCB transactions are exempt, this should be clear from the Level 1 text of EMIR itself.

In addition, the ECB believes it is of key importance to foster international convergence regarding the standards for transaction reporting. This requires mandating the use of globally accepted standards for efficient and consistent reporting of financial transactions in a multi-jurisdictional environment. Within the EU, consistency should be ensured regarding the definitions of the instruments subject to the reporting obligation.

Lastly, consistency should be ensured between the various reporting requirements defined in EU legislation (e.g. between EMIR and the Securities Financing Transactions Regulation, regarding collateral swaps). The ECB strongly supports defining harmonised, detailed reporting specifications for EMIR data, as opposed to the current situation in which each authorised trade repository defines its own reporting formats.

Regarding the clearing obligation, the ECB wishes to reiterate and support the points made by the European Systemic Risk Board in its own response to the public consultation, namely that a swift process to remove or suspend the clearing obligation should be established when the relevant market situation so requires (e.g. certain instruments become illiquid; a CCP is under recovery or resolution procedures), and that systemic risk issues should be more explicitly taken into account when identifying the categories of products suitable for mandatory clearing.

Regarding cross-border activity in the OTC derivatives market, the ECB is concerned that differences in scope and implementation timelines across jurisdictions have created uncertainty and inefficiency for market participants. Such inconsistencies should be avoided as far as possible, as they may lead to competitive disadvantages and level playing field issues.

On the issue of transparency, the ECB believes there are currently several impediments to ensuring that authorities have adequate and comparable access to the data reported. Overall, the regulatory technical standards which aim to address this issue are not detailed and comprehensive enough, leading to heterogeneous data provision by trade repositories. In addition, consistency in data reporting and aggregation would be greatly improved by requiring the harmonised use of international identifiers and nternational standards for key data and messaging formats. Lastly, in the interest of legal certainty, the ECB believes that the SSM and banking supervisors should explicitly be granted access to EMIR data.
Regarding the requirements applicable to CCPs, the ECB recommends defining more granular requirements for indirect clearing and segregation and portability arrangements, in order to reflect recent market developments and the systemic importance of tiered arrangements. In addition, more safeguards could be provided to mitigate the risks of settlement in commercial bank money. Lastly, it is suggested that the requirements regarding the measurement, monitoring and management of exposures to entities other than clearing members be strengthened.

The ECB believes additional requirements for trade repositories are needed to ensure they are adequately fulfilling their role under EMIR. Most importantly, trade repositories need to be provided with clear rules regarding the treatment of data as well as the outputs to be produced, as they currently provide different types of files which vary in terms of content and format.

The full report can be downloaded here.

Compliments of the European Central Bank (ECB)
Finally, the ECB considers that certain other requirements or provisions under EMIR could be further improved. One such improvement could be to address the gaps between EMIR and international guidance adopted by CPMI-IOSCO.