12 December 2019

ESMA publishes responses received to its FRANDT consultation

EBF

The EBF welcomes the opportunity to comment on the proposal for a specification of the conditions under which the commercial terms under which clearing services are provided are to be considered to be fair, reasonable, non-discriminatory and transparent (FRANDT-requirements).

These requirements need to strike the right balance between the interest of clients in having unfettered access to clearing services on the one hand and the interests of clearing service providers. For example, as concepts such as reasonableness and fairness can only be assessed in relation to the prevailing market conditions, which can change over time, rendering FRANDT requirements unfit for purpose if they are calibrated too restrictively. This would likely also increase unnecessarily compliance costs, and it should be taken into account when drafting the rules

The consultation paper generally recognises this by addressing both the difficulties clients may face in getting access to clearing services and the considerable challenges and costs associated with establishing client clearing services. Again, it should be noted in this context that, apart from the factors mentioned under Section 4 of the Consultation Paper (in particular paragraph 23 to 27), the burdens associated with the constantly expanding complex regulatory requirements also work as a significant disincentive to establish or expand client clearing services.

On this delicate basis, any decreased access to clearing as a result of additional regulation should be avoided. In this, the EBF is convinced that the FRANDT-requirements should be carefully calibrated as to ensure a meaningful addition to the existing requirements for the provision of clearing services.

EBF’s key concerns can be summarized as follows:

Before adopting new delegated acts that would specify the conditions under which commercial terms in clearing agreements are considered to be fair, reasonable, non-discriminatory and transparent, the EBF believes that an assessment of the real impact of additional rules should be made, in particular considering whether further rules are needed in addition to the level 1 rules set out under EMIR.

It should be taken into consideration how the introduction of such deeply prescriptive client classification criteria could negatively impact the service providers’ ability to correctly apply their risk management policies. In fact, certain proposals would require changes to these frameworks with the consequence that clearers would have to unwillingly assume certain risks, affecting their participation in the clearing market, even leading to market-exit.

Requirements regarding the contractual documentation used in connection with client clearing services, in particular the proposal to require the institutions to publish the contractual agreements even where these are standard industry documentations (here, a reference to such standard documents should be entirely sufficient and would be clearly more appropriate); and

The requirement to include applicable statutory requirements in the contractual agreement itself.

These elements could be counterproductive as they are likely to cause confusion and even legal uncertainty.

Full EBF response

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Nordic Securities Association

It could be discussed whether it is necessary for the Commission to use its mandate to adopt delegated acts specifying the conditions under which commercial terms are considered to be fair, reasonable, non-discriminatory and transparent (FRANDT), as such rules would add very little in substance. NSA recommends ESMA and the Commission to reconsider whether further rules are needed in addition to the level 1 rules set out under EMIR, which, in our view, are sufficient to address the intended purpose.

In NSA opinion, the FRANDT-rules and ESMA’s proposal infringes on fundamental principles such as free competition and freedom of contract and will, most likely, lead to higher prices and stricter terms and conditions in clearing agreements. It can therefore be questioned whether the proposal will not have the opposite effect of what was intended, i.e. decrease access to clearing.

Should ESMA conclude that additional rules are required, NSA supports the view that the FRANDT-requirements need to be carefully calibrated in order to ensure a meaningful addition to the existing requirements for the provision of clearing services.

Client categorisation: The introduction of prescriptive client classification criteria would severely impact service providers’ ability to adapt their risk management policies and could affect their participation in the clearing market. Too proscriptive requirements could also have an impact on clearing firms’ ability to carry out their business and could, ultimately, lead to some firms leaving the market. The result would be less competition, higher costs for clearing and a higher concentration of risks amongst the remaining clearing members.

FRANDT-compliance: As set out in ESMA’s consultation paper, clearing firms need to show that they are FRANDT-compliant. The ongoing compliance with the FRANDT-requirements in the offering of clearing services is an ongoing obligation and concepts such as reasonableness and fairness changes over time. For clearing firms, this means that they constantly need to monitor and evaluate how they comply with the FRANDT-requirements, which will be very costly and burdensome. NSA urges ESMA to take the costs of complying with the FRANDT-requirements into account when drafting the rules.

Full Nordic Securities Association

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ISDA

ISDA strongly supports ESMA's statement in paragraph 12 of the consultation paper that the scope of the FRANDT regime under Article 4(3a) EMIR is limited to OTC derivatives which are subject to the mandatory clearing obligation. Article 4 EMIR expressly refers only to OTC derivatives subject to the mandatory clearing obligation, so we agree that the FRANDT regime should apply only to these derivatives.

ISDA is concerned that many of the proposals in ESMA's consultation paper will have a significant impact on the risk-management principles that currently govern the provision of clearing services and ensure the safety of financial markets. If clearing service providers are unable properly to manage the risks associated with provision of clearing services, it seems likely that many of them will cease to provide these services, reducing access to clearing for EU market participants and increasing systemic risk in the clearing industry as the risks will be concentrated in a smaller number of clearing service providers.

ISDA and its members were particularly concerned by the following proposals in ESMA's consultation paper:

Client classification: we would recommend removing the reliance on client classification from the proposal. Clearing service providers will each have their own client classification criteria reflecting their risk policies and clearing offering, so ESMA's proposals will not ensure comparability between clearing offerings and will not deliver meaningful benefit for clients.

Public disclosure of contractual terms and fees: we strongly disagree that public disclosure of fees and contractual terms is fundamental to ensuring rational commercial terms, and we consider that transparency can be improved without requiring public disclosure. We have recommended a more proportionate approach below.

Prescriptive requirements and limitations on clearing service agreements: specifying prescriptive requirements and limitations on clearing service agreements will significantly reduce the ability of clearing service providers to appropriately manage the risks associated with provision of clearing services, thereby increasing the risk associated with clearing without increasing access to clearing.

Termination and replacement: ISDA strongly disagrees with the proposal to impose a minimum six month termination period. Clearing service providers need to be able to manage their risk as they deem appropriate, and imposing minimum termination periods will have a detrimental impact on their ability to reduce risk at the time risk-reducing measures may be most needed and most effective.

Full ISDA response

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ALFI

ALFI generally agrees with the approach on transparency and how to publicly disclose fees and commercial terms as well as other conditions of clearing services.

Transparency and fairness requirements can only facilitate the application of the mandatory clearing obligation.

ALFI agrees on the segmented approach to consider different criteria such as, the scope of services, the general contractual terms, fees disclosure, on-boarding fees, fixed fees, fee per transaction. Possible capital charges to the indirect clients depending on their risk profile is also a criteria to take into account. For proper comparability purposes, ALFI would welcome that the aforementioned criteria would be each distinguished by setting out uniform sub-criteria in a sufficiently detailed manner.

Regarding the compression services proposed in addition to the clearing, we observe that very few funds have more than 500 transactions, so this criteria is not a major point.

The treatment of the non-discriminatory aspect should in particular protect small sized counterparties having less bargaining power.

The clearing is an important piece in the Capital Markets Union (CMU) implementation, which should not lead to a consolidation of the industry, but should leave room to smaller players in light of the barriers reported by the EPTF report and the IOSCO report on central clearing interdependencies

Full ALFI response

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Draft technical advice on commercial terms for providing clearing services under EMIR (FRANDT)

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