Uncertainty over Emir may force European banks from some Asia OTC markets

The deadline is approaching for regulators to establish what European banks can clear and where on Asian CCP platforms ahead of OTC market standards going live from March 15

European banks face being cut out of some Asian derivative markets due to the high level of uncertainty over the central counterparty (CCP) services that can be included within the March 15 deadline for the six-month grace period before third-country CCPs must apply for recognition by the European Securities and Markets Authority (Esma).

The European Commission said in a February 8 update to FAQs on the European Market Infrastructure Regulation (Emir) that third-country CCPs currently serving European institutions and recognised by national regulators, such as the UK Financial Services Authority, can continue to do so until the end of the six-month transitional period in September. After this date they will need to have applied for Esma recognition.

However, it is still not clear which services are eligible for inclusion during the transitional period, with a Singapore-based senior management source at a European bank believing this ambiguity has the potential to exclude European firms from some local markets.

“It’s very uncertain which CCPs can in fact get this transitional relief, especially if a CCP begins clearing a new product segment although they may have been already offering a clearing service with European Union (EU) members in a different segment,” he says.

“For instance, if India’s CCIL was going to start clearing forex forwards on April 1, it would have to be recognised by now. As it’s not going to be, conceivably a lot of European banks would be completely shut out of clearing forwards in India. To avoid disrupting a number of markets, it would make sense for all services, including new mandated services, to receive transitional relief until Esma has the time to review each of the CCPs that need recognition," adds the source.

Paget Dare Bryan, Hong Kong-based partner at Clifford Chance, says that while the most recent FAQs clarified some points, there is still ambiguity.

“The updated FAQ clarified that if you are already providing services to a European entity, you are part of the transitioned phase. That took a little bit of heat out of the concern,” he says.

“But it is an open question as to which services exactly this is meant to cover.”

Dare Bryan believes that an argument can be made that a European bank should probably be allowed to clear a new product through an already operational OTC CCP subject to the transitional provisions.

“If you were a CCP in Asia and already allowing European branches to use your services on one OTC asset class such as forex swaps and then you said ‘we’re now going to offer you a different currency under the same platform’, the view seems to be that this is arguably ‘transitional’ because it is just an extension of the existing services already offered through that platform. Even this is unclear,” he says.

A source familiar with regulatory matters in Singapore agrees that accepting new products is not certain.

“Most of us in Asia have looked at the FAQs and the assessment process and in terms of CCPs and new products, this is a place for Esma to clarify,” says the source.

Dare Bryan also highlights the uncertainty surrounding clearing houses that already provide listed futures services to European banks, but are looking to provide OTC clearing after March 15.

“If you set up a whole new legal entity away from the existing entity and you’ve already allowed a European bank access to the original entity, that seems a bit unsure,” he says.

“Additionally, if your legal entity was offering exchange-traded product clearing but then offers OTC clearing, with a whole new default fund, clearing rules and risk management structure, is this included? That’s a question the updated FAQs do not clearly address.”

Ketan Patel, co-head of clearing risk management at Hong Kong Exchanges and Clearing (HKEx), says he does not know for sure whether European institutions will be allowed to use HKEx’s OTC clearing platform when it is up and running later in the year.

“Hong Kong is an international financial centre and we are thinking in those terms. My understanding is Emir might make it difficult for European banks to be connected to us, but I’ve heard that some banks are still trying to clarify the extraterritoriality aspects. We’d welcome European institutions that met our requirements and hope they will be able to use our facilities if they wish,” he says.

After passing Emir in July last year, the EU published FAQs setting out how Emir was to be interpreted in areas concerning non-EU CCPs and trade repositories. These FAQs have been updated twice since then – first in December after the European Commission adopted the Emir regulatory and implementing technical standards and again in February shortly before the European Parliament rubber-stamped the standards.

A spokesman for Esma told Asia Risk that the third update to the FAQs will likely be published early next week, after the March 15 start.