Financial stability: Commission adopts final one-year extension of the transitional regime for capital requirements for non-EU central counterparties (CCPs)

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The European Commission has today extended – by one additional year –the current transitional regime regarding the capital requirements that EU banks and investment firms must maintain when exposed to non-EU central counterparties (‘CCPs’). This transitional regime will therefore continue to apply until 28 June 2022.

Mairead McGuinness, EU Commissioner responsible for financial services, financial stability and Capital Markets Union said, “Today’s decision gives us a bit more breathing space while we continue to work on equivalence decisions. It also gives EU banks and investment firms sufficient time to properly prepare for the possibility of higher capital charges. There will be no more extensions after today’s one.”

This is the last and final extension possible under the Capital Requirements Regulation (‘CRR’). Exposures to those non-EU CCPs which will not be recognised by ESMA by 28 June 2022 will no longer be eligible for lower capital requirements after that date. Stakeholders should start preparing for this possibility.

Background

CCPs operate between the counterparties of a derivatives contract. When a contract is centrally cleared, the CCP steps in and takes the place of the buyer to the seller, and the seller to the buyer. Following the financial crisis, their use was encouraged by the G20, as central clearing reduces risks in derivatives trading, notably the risk of contagion in case a counterparty defaults.

Under the CRR, EU CCPs and non-EU CCPs recognised by ESMA are considered to be ‘Qualifying CCPs’ (‘QCCPs’). EU banks and investment firms are subject to a significantly lower capital requirement for exposures to QCCPs compared to exposures to non-QCCPs.

At this time, a transitional regime under the CRR allows EU banks and investment firms to consider any non-EU CCP that has applied for recognition by ESMA as a QCCP during the recognition process. CCPs in Argentina, Chile, China, Colombia, Indonesia, Israel, Malaysia, Russia, Taiwan, Thailand and Turkey and the United States of America currently benefit from that transitional regime. Those CCPs have not been recognised by ESMA as the Commission has not adopted equivalence decisions for their home jurisdictions, or adopted such a decision only recently.

In the meantime, the Commission will continue its work on equivalence assessments. Nevertheless, the outcome of those assessments cannot be predicted and for various reasons there is no guarantee that the Commission will adopt equivalence decisions for all of these jurisdictions. An equivalence decision by the Commission is a prerequisite for ESMA to recognise a non-EU CCP. It is therefore possible that these non-EU CCPs, or some of them, will not be recognised by ESMA to provide clearing services in the EU.