The European Association of Co-operative Banks (EACB) welcomes the opportunity to contribute to the discussion around the draft requirements regarding indirect clearing. It does so because as it has several times been reported the smaller members in particular have serious difficulty in accessing CCPs both for reasons of (non) availability and cost. In general, the analysis of ESMA is in line with the positions we have already expressed in several occasions (see also our response to the in the Consultation Paper on indirect clearing under MiFIR and EMIR). In particular, the situation described in paragraphs 11 to 15 of the Consultation reflects the experience of our medium sized and smaller members. Indeed, we have received reports from our members that small banks have difficulty in finding swap providers prepared to deal with them (whether on cleared or uncleared basis), or being quoted two prices, a favourable one based on CCP clearing, and an adverse one based on traditional bilateral settlement. We have the feeling that the clearing obligation is, in isolation, only one – though probably the most important – part of a series of measures which are together having the unintended consequence of reducing small FCs’ access to derivatives altogether. ESMA’s current proposal, though welcome, cannot deal with the wider problem. We would encourage ESMA to carry out a wider study into this area.
It should be borne in mind that smaller cooperative Banks and Building Societies need derivatives mainly in order to hedge their interest rate risk on e.g. mortgages and other retail bank products at initial fixed rates.
Should no solutions become available, small banks, building societies and financial firms will de facto not be able to keep an efficient risk management activity (particularly for the interest rate risk) by means of trading OTC derivatives to hedge their positions. This hedging is a vital part of the retail and real economy focused business of cooperative banks, providing an essential managing tool that then allows those banks to effectively finance individuals and SMEs. Due to these problems, the clearing obligation is unintentionally forcing smaller financial firms out of the derivatives markets. This reduces competition and shifts market balance. Pushing these companies out of business would deteriorate the credit conditions of SME segment even further and thus jeopardize the fragile recovery of European economies. This would be inconsistent with the Capital Market Union policy agenda aiming to remove barriers to the free flow of capital in Europe and the variety of other policy makers’ positive initiatives to stimulate economic growth in Europe.
With this in mind the EACB supports the exclusion from EMIR central clearing of all non- systemically important firms – that is also smaller Financial Counterparties (FC) and not just the Non- Financial Counterparties (NFC). Indeed, small and medium-sized FCs have severe problems to enter into clearing relationship, due to both cost and availability issues. Indirect or client clearing offerings have not proven to be successful due to legal and practical challenges. Only a small number of clearing members are able to offer to clear on behalf of smaller counterparties but at a cost totally disproportionate compared to the business of smaller players. In that regard, the EACB also draws to the Commission's attention that the current EU regime under EMIR is far more burdensome for small banks than in other major jurisdictions.
To address the issue the EACB proposal is, in principle, to exempt small credit institutions from the clearing obligation - at least in respect of hedging contracts only. In the EACB’s view this principle provides the best and most proportionate trade-off between on the one hand systemic risk and financial stability considerations, and on the other hand minimising the burden and anti-competitive effect of EMIR on small institutions. This could be achieved through the on- going EMIR review process. As international comparisons indicate, there are various ways to implement this principle through specific exemption thresholds. The EACB’s view is that the simplest and most satisfactory approach is to set an exemption threshold based on balance sheet size of the institution. We would propose to set this at € 8 billion – close to the equivalent exemption threshold of US$ 10 billion for small US banks. At the very least, this should be set no lower than € 5 billion.
Having said that, we fully support ESMA proposal to extend the phase-in period for the clearing obligation to the smallest financial counterparties (those in Category 3) as a short term solution that will allow changes in EMIR Level- 1 text to be considered.
Moreover, we would like ESMA to confirm our assumptions that 1) in case of transactions between a bigger financial counterparty and a smaller financial counterparty (which will be granted a longer phase-in period) the clearing obligation between these two counterparties will also be postponed for two years 2) the margin requirements for non cleared derivatives will be applicable on smaller financial counterparties if they come into force before the extended phase- in of the clearing obligation has ended. If that is the case, in our opinion, the coming info force of the margin requirements and the end of the phase- in of the clearing obligation should be attuned.
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