Milano, 5 September 2016 Prot. n. 98/16 MFE/gc ESMA CS 60747 103 rue de Grenelle 75345 Paris Cedex 07 France RE: ASSOSIM response to ESMA Consultation Paper on the clearing obligation for financial counterparties with a limited volume of activity The Italian Financial Markets Intermediaries Association - ASSOSIM 1 welcomes the opportunity to provide the views of its members on the analysis presented by ESMA in this consultation paper. Please, note that the present document was drafted in cooperation with the Italian Banking Association (ABI), who has also submitted a response to the present consultation. ***** Question 1: To which category of counterparties does your organisation belong: (1) in the context of the 1st Commission Delegated Regulation on the clearing obligation, and (2) in the context of the 2nd Commission Delegated Regulation on the clearing obligation? Please indicate the likely category of counterparties if the determination has not been done yet. For respondents that are in none of the four categories, please indicate the nature of the activity performed in relation to the clearing obligation (e.g. CCP). For associations, please indicate the category of counterparties that you mainly represent. 1 ASSOSIM represents the majority of financial intermediaries acting in the Italian Markets. ASSOSIM has nearly 80 members represented by banks, investment firms, branches of foreign brokerage houses, active in the investment services industry, mostly in primary and secondary markets of equities, bonds and derivatives, for some 82% of the Italian total trading volume.
ASSOSIM represents financial counterparties (FCs) belonging to Categories 1, 2 and 3, the majority of which are classified in Categories 2 and 3. Question 2: If you offer clearing services, please provide evidence on the constraints that would prevent you from offering clearing services to a wider range of clients. Our members confirmed November and December 2015 s landscape being unchanged in this regard 2, by reiterating the very concentrated market condition for the offer of clearing services by clearing members (CMs) and clearing brokers (CBs). Such clearing business concentration in the hands of few CMs/CBs is certainly not aligned with the interest of the FCs, neither with the ratio and goal of the legislative framework of EMIR, nor with ESMA s. Also, every FC should have a clearing agreement in place with a CM (CM1) and a back-up CM (CM2). However, the concentration of the offer of clearing services reported by our members makes it extremely difficult for an FC to find a CM2 willing to act as a back-up clearer. Yet, a back-up CM could turn indirectly beneficial also to the CM1 (with which a client signs its first clearing arrangement) as the terms and conditions provided for in the contract binding the client and the CM1 may be reviewed by the latter because of objective reasons (i.e. different markets scenarios). Should the client be not in a position to accept such new terms and conditions, it could then easily switch to CM2 with no prejudice to the clearing activity and the related processes. But this scenario is basically far from reality, as clients reported significant issues (summarised in our answer to Q.3) in liaising with CM1 in the first place and all the FCs with small volumes in IRS and CSD reported not to be in a position to find a CM2 interested in their business volumes. Eventually, from the viewpoint of a CM, a recent 3 statement by former Commissioner Jonathan Hill strikes on the importance of other important factors influencing the offer of such services: Unless it's properly designed, the leverage ratio 4 could increase the cost of clearing to such a degree that it will reduce the number of banks offering these services to clients. Question 3: Have you already established clearing arrangements (1) for interest rate swaps? (2) for credit default swaps? If not, please explain why (including the difficulties that you may be facing in establishing such arrangements) and provide an estimation of the time needed to finalise the arrangements. 2 November and December 2015 correspond to the time of the latest ESMA s public consultation on this topic, i.e. ESMA 2015/1628, in occasion of which we presented similar comments in this regard, as the offer of clearing services is reported unchanged and highly concentrated over few CMs/CBs (as better described below). 3 Risk.net, July 27 th, 2016 4 http://www.bis.org/bcbs/publ/d365.pdf 2
A large portion of our members classified in Cat. 2 and 3 has not formally established clearing arrangements in IRS and CSD yet. The relevant explanations provided in such respect are the following: a) Disproportion of the economic terms (costs) associated to accessing clearing for parties with very small outstanding notional of derivatives. Such expensive costs lead FCs to extend the (even territorial) scope of their research for affordable economic terms for accessing clearing, but this occurs in (and come up against) the current scenario of nil competition in the offer of such services due to the tiny number of CMs/CBs operating on the relevant market and willing/available to offer their services to small sized clients. Among these few CMs/CBs, even less are those classifiable as being within reach by FCs with small volumes of derivatives as, typically, the latter are local banks with limited resources able to interface foreign CBs, something that adds on top and leads the research to no viable outcome; b) Among those FCs which managed to deal directly with a Clearing Member of a CCP (CM/CMs), it was noted that initially CMs showed to be very dynamic and willing to involve the potential client, but when formal talks focused on the actual content and clauses of the Clearing Agreement (formally binding the client/fc and the CM) the pace of the negotiation process commenced to slow down and take longer (up to 8/9 months). On the basis of the feedback received by our members, this situation occurred mainly due to i. in-house organizational issues of the CMs, revealing poor time management skills in the relation with the FC interested to become a client; ii. frequent and material contractual amendments proposed by the CM at the very final step(s) of the negotiation process with the potential client, showing also reluctance to amend the provisions of the contract according to the suggestions of the potential client(s). In addition, and surprisingly, some had to deal with the request(s) of the CM to impose limits/caps to the clearing activity of the potential clients, with subsequent frequent requests to amend accordingly the commercial agreement formerly agreed and signed with the client. All-in-all, the issues described above seem to sum up in the lack of appropriate and efficient management of the commercial and contractual talks and agreements initiated with a potential client. c) Other FCs, further to the issues described in points (a) and (b) above, signalled extreme difficulties reported by their IT outsourcer developer(s), with extremely costly and very slow-paced progresses. 3
The estimation of the time needed to finalise the documents relating to the clearing arrangements was reported by our members as varying from at least 7/8 months to 12+ months since the beginning of formal talks with a CM. Question 4: Please provide information and data you may have that could complement this analysis on the level of experience and preparedness of financial counterparties with CCP clearing. Our members are extremely satisfied and agree with the analysis presented by ESMA in pages 11 to 16 of the CP and are not in a position to complement it with further and more insightful data. They found a number of confirmations of what they experienced in the market in ESMA s investigations such as, for instance, the fact that (see Table 1) 0,59% of IRD/IRS notional amount (a very residual % amount, corresponding to almost 2bn of notional) is spread over 5365 counterparties (a very large number of parties). A further comment from some of our smaller FC members underlines the importance that ESMA be aware of the fact that, by the time the CO will be applicable to Cat. 3 FCs, many of those with the smallest outstanding notional in derivatives might have exited the derivative business which they had historically and mainly undertaken complementarily to the business of credit provision as they might be in a position not to recover the expensive cost of accessing clearing. Should this occur, as we already described in detail in our answer to ESMA s 2015/1628 consultation (see answer to Q9 therein), the final outcome would be actually contrary to EMIR s goals, as some types of financial risk (interest and credit) would no longer be hedged by such FCs. Question 5: Do you agree with the proposal to keep the definitions of the categories of counterparties as they currently are and to postpone the date of application of the clearing obligation for Category 3? If not, which alternative would achieve a better outcome? Yes, our members agree to both keeping the definitions of the categories of counterparties as they currently are and postponing the date of application of the CO for Category 3. However, as our members regard that the issue of accessing clearing for FCs with the smallest activity (in derivatives subject to the CO) is and will likely remain tangible for months to come, they would suggest ESMA to closely monitor the evolution of the offer of client clearing and indirect clearing services, across every region of the EU, during the next 12-to-18 months. By the end of 2017 or early 2018, it should be evident whether major steps forward would be achieved in terms of wider and more spread offer of such services. Should (i) the number of entities offering clearing services (by early 2018) remain stable and equal to the current (mid- 2016) number of players and (ii) the actual offer of indirect clearing not go under major 4
expansion (expansion which would be expected to be associated to some level of competition in such field and, consequently, to more favourable terms and conditions for such FCs to access clearing), then our members would suggest ESMA to: (i) reconsider the current methodology of counterparties classification (CC), moving from a CC based on the (static data) outstanding notional of the derivative contracts of a counterparty to a CC focused on the actual turnover reported by an FC. As a consequence, those FCs showing the smallest activity in derivatives subject to the CO might reveal to have an even more paltry/scant role in the contribution to the systemic risk (via their derivative contracts); (ii) perform an analysis (at the end of 2017) to assess whether the introduction of an exemption from the CO, exclusively for Cat.3 FCs with minor turnovers, might be considered, as this would not affect in any way the remainder 99,41% (see Table 1) of derivative contracts which will continue to be brought to central clearing. This view seems to be consistent and confirmed also by the content of par. 61 on page 19 of the CP. Also and eventually, it is significant to note the recent announcement (dated 1 st of August 2016) 5 by the US Federal Deposit Insurance Corporation (FDIC), US Federal Reserve and US Office of the Comptroller of the Currency of the final rule (implementing a law passed by the U.S. Congress in January 2015), exempting from the margin requirements the non-cleared swaps of commercial end users, small banks, savings associations (and other institutions) with $10 billion or less in total assets 6 (i.e. reference is not made to outstanding notional of derivative contracts), as long as noncleared swaps hedge or mitigate commercial risk of these counterparties and satisfy the rule's requirements for an exemption from mandatory clearing. On the contrary, the systemic risk would increase, and not marginally, should the (direct or indirect) access to clearing services not develop adequately in the next 12-to-18 months, leading several Cat. 3 FCs (among those with the smallest amounts in derivatives) either to face expensive costs to clear their derivative contracts or to exit the derivative business as they would not afford such level of costs associated to accessing clearing. Should the latter occur (it is not unlikely), these entities will not be able to preserve an efficient and effective risk management activity (particularly in relation to the interest rate risk) by means of trading OTC derivatives to hedge their positions. Practically, this would translate in small financial banks and intermediaries, cooperative banks and building societies active in fixed rate mortgages, having to decide either not to offer fixed rate loans (reducing the choices offered to consumers), or to provide these services without being able to hedge against that risk, which would in turn (and 5 See the FDIC press release at: https://www.fdic.gov/news/news/press/2016/pr16062.html 6 As published by the Financial Times (July, 25 th, 2016) referring to data from the US Federal Reserve and from the US Federal Financial Institutions Examination Council, such threshold set at $ 10 bn means that only 85 of the 5,260 commercial banks in the US have to comply with the clearing requirement 5
eventually) lead to an increase in the overall interest rate riskiness (which is opposite to the one of the main goals of EMIR) with the potential for affecting also their local activity of credit supply to the local economy. Question 6: Do you agree with the proposal to modify the phase-in period applicable to Category 3, by adding two years to the current compliance deadlines? Yes, our members agree with this proposal. Question 7: Do you agree with the proposal to modify the three Commission Delegated Regulations on the clearing obligation at the same time? Yes, our members agree with this proposal. ***** We remain at your disposal for any further information or clarification. Yours faithfully, 6