The European Banking Authority (EBA) launched today an open consultation on Draft Regulatory Technical Standards (RTS) on the capital requirements for central counterparties (CCPs). These RTS are drafted according to the Regulation on OTC derivative transactions, central counterparties and trade repositories (EMIR). The consultation runs until 31 July 2012.
The EMIR Regulation requires CCPs to collect margins, to maintain a pre-funded default fund and to maintain dedicated own resources to cover their losses upon the default of one of their clearing members. Additional capital is also required under Article 16 to mitigate, on the one hand, against market risk, credit risk and counterparty credit risk arising from non-covered activities and, on the other hand, against operational risk arising from all activities of a CCP. The draft RTS developed by the EBA are intended to specify these additional capital requirements.
Main features of the RTS
The draft RTS proposed for consultation require a CCP to hold capital, including retained earnings and reserves, that is at all times at least equal to the sum of: (i) its operational expenses during an appropriate time span for winding-down or restructuring its activities, (ii) its capital requirements for the overall operational risk, and (iii) its capital requirements for credit, counterparty credit and market risks stemming from non-covered activities it carries out.
The approach proposed follows and further elaborates on the existing recommendations developed by the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) on financial market infrastructures.
The proposed consultation paper is based on the EMIR texts as adopted by the European Parliament on 29 March 2012 and by the Council on 11 April 2012. The two texts are now being reconciled by jurist linguists and the final EMIR text will be signed and made available before August.
The final draft RTS will be submitted to the EU Commission for endorsement by 30 September 2012.
Comments on this paper can be sent to the EBA by e-mail to CPfirstname.lastname@example.org by 31 July 2012, indicating the reference EBA/CP/2012/08.
All contributions received will be published unless you request otherwise.
A public hearing will take place at the EBA premises on 4 July from 13.00 to 16.30. To register, click here
Notes to editors
- The primary function of a CCP is to act as an intermediary between the counterparties to a bilateral trade, so that the parties’ bilateral trade is re-placed by each of them having a separate trade with the CCP. In this way, the CCP takes on the risk of the potential loss to which a party could be exposed if its counterpart were to default. Where one counterparty to default, the CCP acts in the place of the defaulted counterparty and makes good its payment obligations. Therefore, a CCP allows market participants to trade without being exposed to the risk of each other’s default.
- Draft RTS are produced in accordance with Article 10 of the EBA regulation and must be subsequently endorsed by the European Commission (EC). They shall be adopted by the EC by means of regulations or decisions. According to EU law, EU regulations are binding in their entirety and directly applicable in all Member States. This means that, on the date of their entry into force, they become part of the national law of the Member States and their implementation into national law is not only unnecessary but also prohibited by EU law, except in so far as this is expressly required by them.