The European Fund and Asset Management Association (EFAMA) has published its response to the European Commission’s (EC) December EMIR 3.0 proposal, voicing concerns around what a mandated active EU CCP account system might do to clearing competition and efficiency.
The EC’s proposal announced at the end of last year included simplified product approvals, faster model change authorisations and increased margin model transparency, alongside the proposal of a new clearing threshold calculation, designed to increase the attractiveness of EU CCPs.
EFAMA said the objective of maintaining a competitive and efficient clearing ecosystem would be undermined by the proposal to introduce mandated active accounts at EU CCPs, suggesting the proposal leaves various key questions open around the methodology for determining the clearing thresholds and the level at which they would apply (client, fund or investment manager).
“Asset managers require a free choice of CCP in order to fulfil their fiduciary duty to act in their client’s best interest and obtain the best investment outcomes. The measures to enhance EU CCP attractiveness should in themselves draw greater clearing activity organically, without the need to introduce an active account obligation,” said EFAMA in a statement.
The association also noted a few issues related to active accounts including that it forces them to split up while also creating diversion to a smaller liquidity pool which EFAMA states will increase spreads and reduce the netting benefits available to clearing clients, with the impact passed on to the end-investor.
EFAMA also noted that the proposal underestimates the required operation build to implement active accounts. To conform to the new proposal, various clearing clients would have to transition from a mono-clearing channel to a dual clearing channel, which will have related subscription costs and technical set-up.
Another overlooked element highlighted by EFAMA is the ongoing monitoring and calculation activity that is required to manage two separate trading flows which must meet externally set thresholds.
Elsewhere, EFAMA recognised that the removal of FX forwards and swaps (hedging instruments) from the clearing threshold calculation would be useful, comparing it to the same rationale that sees them excluded from variation margin requirements today.
“Such an exclusion is already applied to non-financial counterparties. EFAMA further supports the conversion of the temporary exemption from margining requirements for single stock and equity index options into a permanent exemption as this would level the global playing field and ensure the competitiveness of EU firms,” said EFAMA.