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16 July 2010

EBF response to EC consultation on derivatives and markets infrastructures


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The EBF encourages the Commission to assess thoroughlythe exemptions from the general clearing obligation for non-financial undertakings on the basis of systemic risk considerations and their applicability to financial counterparties.


The EBF is supportive of central clearing. The process to determine that a clearing obligation exists for any given derivative contract should be triggered by a request from the clearing infrastructure, with the favourable advice of its Risk Committee. The Federation disagrees with the so-called top-down approach. Whilst ESMA conducts the assessment to determine a clearing obligation, EBA and the ESRB should have veto powers over the final decision. ESMA’s public register should include contracts subject to mandatory clearing and those for which the assessment has been negative. The application of a clearing obligation to third country firms should be agreed internationally. An exception should be granted to intra-group transactions. The EBF strongly encourages the Commission to assess thoroughly whether supported exemptions from the general clearing obligation for non-financial undertakings on the basis of systemic risk considerations could also be applicable to financial counterparties.
The EBF is supportive of robust governance arrangements for CCPs in view of their potentially systemic relevance to the stability of the financial sector. CCPs shall take the appropriate actions to guarantee the permanent fulfilment of their obligations in order to reduce the source of operational risk for themselves and for their participants. To this end, users (i.e. banks) must be adequately represented in the Risk Committee, as they ultimately bear the default risk of a CCP through contributions to the default fund.
The EBF considers that rules to address potential conflicts of interest should apply to all CCPs, irrelevant to their model, and should not depend on the ownership structure. Also, as CCPs are single-purpose organisations which, by definition, are risk takers, they should not get involved in any non-core business activities. While the default fund should be mandatory, CCPs should resist lowering the initial margin levels in an attempt to compete on risk management. Finally, CCPs could have access to central bank liquidity in exceptional circumstances but not at the expense of lower risk management neither it should lead to moral hazard situations.
The EBF is supportive of interoperability as a general principle. A general right to interoperability may however have unwanted consequences like a market paralysis due to excessive links, many of them becoming useless or inactive. Therefore, it is important to also consider users’ demand (in addition to the basic risk evaluation) as a prior requirement for interoperability. As there is serious doubt that interoperability can effectively be introduced in the area of derivatives, this concept must at present be limited to cash instruments.
The EBF is supportive of a regulatory reporting obligation inclusive of all derivatives trades, irrespective of their clearing modality. The regulatory reporting obligation should be constructed in such a way so as to replace any resulting duplicate reporting obligations. If the financial institution is part of the contract, it should be enough with one communication (i.e. the one from the financial entity) to the trade repository. Contracts were no financial institution is involved should be reported by any of the counterparties.


© EBF

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