EMIR amendments: Euro-clearing in the Eurozone?

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EU Member States’ experts on financial services policy will get back to the negotiating table in September to start substantive talks on the European Commission (EC) proposal to amend the European Market Infrastructure Regulation (EMIR). This seeks to enhance the EU’s supervision of euro-denominated derivatives’ clearing in light of Brexit, potentially by bringing the bulk of the currently London-based activity in the Eurozone.

The financial industry may be warning that forced “relocation” of London’s clearing operations would tear up markets, increase the cost of trading and weaken the euro, but Member States and the European Parliament will have to negotiate on the basis of a well-made draft.

The Commission has calibrated a politically well balanced framework, introducing an optional location policy founded on the paramount objective of preserving financial stability in the Eurozone. The changes proposed to euro clearing have been carefully calibrated to avoid being trapped into primary law quantitative thresholds on specific instruments, which would have made the system slow and inflexible, and create broad enough legal provisions to potentially allow policy-related, i.e. Brexit-driven, decisions.

In the Council, the political battle is expected to concentrate not only on the general structure of the new authorisation and supervisory system for CCPs, but rather more specifically on the enhanced role of the Commission and the European Securities and Markets Authority (ESMA), their room for manouvre, accountability to the co-legislators and powers to intervene.

According to the EC proposal, the role of Member States is rather indirect and confined to their regulators and central banks but the Council will possibly endeavor to be given better scrutiny of the new third country/location policy system.

This debate will be further complicated by the European Central Bank’s (ECB) plead for more powers in the clearing space. Explicitly put in a recommendation adopted by its Governing Council in June, the ECB’s pursuit of regulatory powers over CCPs could form the recipe for a direct disagreement with the proposed ESMA powers on CCPs as drafted by the EC in its proposal.

The powers provided to national central banks in EMIR look secondary compared to the empowerment of ESMA, which – not being an EU institution as per the Treaties – will always be obliged to pass through the EC when delivering a recommendation on location policy.

Were the ECB be empowered with CCP supervision and location policy, the EU executive’s role would very likely be reduced and the political angle of decisions watered down. Furthermore one could speculate that the ECB is preparing in case the EMIR location policy, for whatever reason, will not be adopted and/or be heavily modified by co-legislators.

If for example the ECB Statute is modified and the EMIR amendments are blocked in Council and Parliament, the Central Bank could potentially have the powers to regulate the clearing space, including requesting CCPs to relocate in the Union.

In view of the above, discussions at Council and Parliament level are expected to be politically charged, with manifold challenges at the horizon. As a reminder the ECB pushed very hard withing the first iteration of EMIR to carve out for itself a primary role on clearing but did not succeed.

This time round Brexit might help Frankfurt secure its desired prize.

Salvatore Ferrara