ESMA mulls “enhanced” CCP supervision
16 January 2020 Paris
Image: Shutterstock
The European Securities and Markets Authority (ESMA) has hinted at plans to impose enhanced supervisory practices on central counterparties (CCP).
The proposals come as part of ESMA’s final report on its investigation into the circumstances that caused a single individual acting as a direct clearing member on the Nasdaq Commodities clearing segment to default in 2018.
The EU watchdog said the event highlighted the importance of membership criteria as a first line of defence of CCPs to control counterparty credit risk.
In its report, ESMA says it will consider enhancing supervisory practices, possibly by some form of guidance on detailed practices.
The investigation included a survey of 17 EU CCPs that reviewed how they conduct their monitoring of compliance to membership requirements, whether individuals can be clearing members, and what membership criteria EU CCPs apply.
From the survey results, it was highlighted that no EU CCP currently has an individual (meaning a physical person) acting as a clearing member.
Twelve clearinghouses stated their rules did not allow individuals to participate as clearing members, while four others did not rule out the possibility, on the condition that the individual met all admission criteria. An additional CCP said it was currently reviewing its rules on the matter.
From its review, ESMA said it had identified several examples good practices of CCPs were identified with respect to on-going due diligence of CCP’s clearing members, including internal credit classification; warning monitoring system of their economic and financial situation; availability of reporting packages or connection to CCP dedicated risk system; mandatory due diligence questionnaire; regular engagement with clearing members; and on-site visits.
ESMA says it is now considering these findings and will “look to enhance supervisory practices and continue to provide further guidance on the areas for which CCPs would be expected to have detailed due diligence practices”.
The proposals come as part of ESMA’s final report on its investigation into the circumstances that caused a single individual acting as a direct clearing member on the Nasdaq Commodities clearing segment to default in 2018.
The EU watchdog said the event highlighted the importance of membership criteria as a first line of defence of CCPs to control counterparty credit risk.
In its report, ESMA says it will consider enhancing supervisory practices, possibly by some form of guidance on detailed practices.
The investigation included a survey of 17 EU CCPs that reviewed how they conduct their monitoring of compliance to membership requirements, whether individuals can be clearing members, and what membership criteria EU CCPs apply.
From the survey results, it was highlighted that no EU CCP currently has an individual (meaning a physical person) acting as a clearing member.
Twelve clearinghouses stated their rules did not allow individuals to participate as clearing members, while four others did not rule out the possibility, on the condition that the individual met all admission criteria. An additional CCP said it was currently reviewing its rules on the matter.
From its review, ESMA said it had identified several examples good practices of CCPs were identified with respect to on-going due diligence of CCP’s clearing members, including internal credit classification; warning monitoring system of their economic and financial situation; availability of reporting packages or connection to CCP dedicated risk system; mandatory due diligence questionnaire; regular engagement with clearing members; and on-site visits.
ESMA says it is now considering these findings and will “look to enhance supervisory practices and continue to provide further guidance on the areas for which CCPs would be expected to have detailed due diligence practices”.
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