Concerns remain over EU's post-Brexit clearing rules
Finance industry executives have raised concerns over the shape of landmark European Union reforms aimed at bringing more euro derivatives clearing activity within its borders, highlighting the challenges still facing the EU's top markets watchdog ahead of the publication of its final clearing rules before the end of June.
The European Securities and Markets Authority issued draft standards in November on how European derivatives users should comply with the incoming “active account requirement”, or AAR – a contentious rule that would force EU firms to funnel a certain amount of euro derivatives trades through EU-based clearinghouses. The rule represents the EU's flagship policy aimed at prising more euro interest rate swap clearing activity from London following the UK’s exit from the EU.
Under the proposals, EU firms with more than €3bn of gross notional value in euro interest rate derivatives must hold an “active” account at an EU clearinghouse by clearing a minimum number of trades there every year. In practice, derivatives experts say there is still confusion over exactly how much clearing activity must be rerouted from London.
Some are also worried about the potentially complex and onerous reporting requirements for EU derivatives users looking to comply with the rules. They will have to inform ESMA every six months of their euro interest rate derivatives exposure.
“It’s good that there’s finally some clarity [on the AAR, as] it’s been uncertain what would be requested of us for this topic for a number of years,” Jasper Valstar, senior portfolio manager at Achmea Investment Management, told Eurex’s annual derivatives forum in Frankfurt on Wednesday. “[But] on the reporting side there needs to be a way to [avoid] making a big operational burden on us or banks.”
Eurex runs the largest EU-based interest rate swap clearinghouse. LCH, which operates the largest global interest rate swap clearinghouse from London, is part of LSEG, which also owns IFR.
Such concerns echo those raised by industry experts last month at the International Swaps and Derivatives Association's annual legal forum in London – such as how many trades users actually need to clear at an EU central counterparty to comply with the AAR. Many say the proposals are written in dense legal language that is hard to decipher.
“It’s not entirely clear what you have to do in order to demonstrate that you've got an account that's active and functional,” Caroline Dawson, partner at law firm Clifford Chance, said at the ISDA event.
Not best ex?
Others have raised questions over the practicality of complying with a carve out from the rules that ESMA has proposed, whereby any EU firm that already clears at least 85% of their euro interest rate derivatives at an EU clearinghouse would be exempt from reporting their exposure every six months. Some say this carve out could clash with EU regulations over best execution, in which firms must secure the best price on financial transactions.
“Some [firms] are looking at this 85% [threshold] and [are] considering potentially doing all their business at Eurex going forward, but that raises questions on best execution … [which] are not trivial, “said Gaspard Bonin, deputy global head of derivatives execution and clearing at BNP Paribas, speaking at the Eurex event.
The location of euro derivatives clearing has been a major sticking point in cross-border financial services regulation following Brexit. While more credit default swap clearing activity has moved to Paris after ICE shut its London-based CDS clearinghouse in 2023, the EU has struggled to engineer a mass migration of euro-denominated interest rate swaps clearing from LCH.
“While we have seen a bit of progress, we also still witness … an excessive reliance of EU counterparties on offshore clearing systems, which pose an element of substantial systemic [risk] to the EU,” Klaus Lober, chair of the CCP supervisory committee at ESMA, told the Eurex forum.
Eurex has more than 700 clearing members and clients but only around a third hold an “active” account, said Matthias Graulich, executive board member at Eurex. “We expect that to change once [the AAR] comes in,” he said.
A final version of the AAR is expected to be published by ESMA before the end of June, Lober said. But it won’t go live until it has been endorsed by the European Commission.