The European Banking Authority (EBA) adopted today the draft technical standards on capital requirements for Central Counterparties (CCPs) under the EMIR Regulation. The draft standards will now be sent to the European Commission for their adoption. The EBA also adopted an Opinion on the same topic.

Main features of the draft Regulatory Technical Standards (RTS)

The draft regulatory technical standards (draft RTS) were developed by the EBA aim at specifying the requirements expressed in the EMIR Regulation (Regulation on OTC derivative transactions, central counterparties and trade repositories) regarding the capital of a CCP.

The draft RTS provide that a CCP should hold capital, including retained earnings and reserves, that is at all times at least equal to the sum of:

• the CCP's gross operational expenses during an appropriate time span for winding down or restructuring its activities;
• the capital necessary to cover the overall operational and legal risks;
• the capital necessary to cover credit, counterparty credit and market risks not covered by specific financial resources; 
• the capital necessary to cover business risk. Since the level of business risk is highly dependent on the individual situation of each CCP, the capital requirement should be based on a CCP‟s own estimate subject to the approval of the competent authority.

Furthermore, a floor needs to be introduced in order to ensure a prudent level playing field for the capital requirements of a CCP. 

Next steps

The draft RTS will now be sent to the European Commission (EC) who shall decide whether to endorse it within 3 months. Following an eventual endorsement by the EC, the European Parliament and the Council of the EU may object to the regulatory technical standards before it enters into force.
 
The standards will have the legal form of a Regulation and will be directly applicable across the European Union. They will be published in the EU Official Journal and translated in all EU official languages.

Opinion

The European Banking Authority also adopted an opinion in order to raise awareness of the European Commission regarding market developments and supervisory practices which should be taken into consideration for a future review of the EMIR Regulation.

In this respect, it is the EBA's view that competent authorities should be allowed to apply to a CCP an additional capital charge in order to mitigate risks which may arise from situations not covered by the EMIR, such as reputational risk or other risks that may arise from the economic or business environment. This approach would be similar to the Pillar 2 approach applied to credit institutions. 

The EBA also suggests that intraday credit risk is properly set either within the EMIR framework or with the proposal of a special regulation by the EU-COM. In addition, it is the EBA's view that the interoperability arrangements other than for cash products should be properly set out in the EMIR text.

Notes to the editors
(1) The Regulation (EU) No 648/2012 on OTC derivative transactions, central counterparties and trade repositories, known as EMIR, lays out provisions with the view to increasing the safety and transparency of the over-the-counter (OTC) derivatives markets. It introduces a legal obligation to clear OTC derivatives transactions through central counterparties (CCPs) and establishes organisational, conduct of business and prudential requirements for CCPs to ensure that these institutions are robustly risk-managed and financially sound, irrespective of the financial instruments cleared. The 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 the EMIR 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.

(2) As foreseen in Article 10 of the EBA regulation Draft RTS are produced in response to mandates provided to the EBA by sectoral legislation. They must and must be subsequently endorsed by the European Commission by means of regulations or decisions. Following an eventual endorsement by the European Commission, the European Parliament and the Council of the EU may object to the regulatory technical standards according to Article 13 of the EBA founding regulation. 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.