EU snubs plan to delay CCP open access rules, for now

Attempt to squeeze delay into crowdfunding rules fails, but Mifid review provides last chance

time freeze - Getty
Frozen out: 24-month delay to obligation requiring venues give listed derivatives traders freedom of clearing choice

A proposed 24-month delay to the obligation requiring trading venues to allow listed derivatives traders the freedom of choice on where to clear their trades has been excluded from a final agreement on unrelated rules for crowdfunding platforms, Risk.net has learned.

The European People’s Party (EPP), a centre-right group in the European Parliament, had requested a delay to the obligation in an email, which was leaked to Risk.net. The idea was to insert a short section introducing this delay into the crowdfunding legislation as a way of expediting the change without needing to draft and approve a separate law.

However, a spokesperson for the Council of the European Union confirms that an agreement on the crowdfunding file with the European Parliament on December 19, 2019 does not include the delay.

“The text of the crowdfunding agreement is not yet finalised, but I can confirm that this issue was not discussed, and therefore not agreed, as part of the political deal on the regulation,” says the spokesperson.

A political agreement means legislators agree on the overall legislation, although technical work is still needed to translate the agreement into actual draft rules. The final text will then need to be endorsed by the council and the parliament.

An end-user source with knowledge of the discussions adds that the delay to open access was not even requested by the European Parliament rapporteurs during negotiations, although the email from the EPP’s shadow rapporteur had suggested this insertion as part of the trilogue process with the council and the European Commission.

The text of the crowdfunding agreement is not yet finalised, but I can confirm that this issue was not discussed
A spokesperson for the Council of the European Union

The two rapporteurs assigned to the crowdfunding legislation had expressed opposition to the delay in emails to Risk.net sent before the agreement.

Caroline Nagtegaal, one of the two rapporteurs, said she did not want to delay the finalisation of the crowdfunding legislation and that the open access provisions had nothing to do with crowdfunding platforms. Meanwhile, the second rapporteur, Eugen Jurzyca, said he was generally in favour of lowering barriers to competition – signalling support for open access, which inhibits the formation of vertical monopolies in trading and clearing.

Provisions in the second Markets in Financial Instruments Directive (Mifid II) and its accompanying regulation (Mifir) require exchanges to accept requests to clear exchange-traded derivatives (ETDs) executed on their platforms from central counterparties (CCPs) that are part of rival companies. Currently, some exchanges in Europe operate exchange-and-clear silos, whereby ETDs executed on their platforms can only be cleared by a CCP within the same corporate group.

Germany’s Deutsche Börse operates an exchange-and-clear silo, only allowing ETDs traded on Eurex Exchange to be cleared by Eurex Clear. Similarly, UK-based Ice Futures only allows traders to clear ETDs at Ice Clear.

Despite Mifid II entering into force in January 2018, Europe’s exchanges are benefiting from a 30-month exemption from the obligation, which expires on July 3, 2020. Mifid II does not contain any further carve-outs that would allow exchanges to reject open access requests after that point. The earliest an interoperability arrangement is expected to commence is from March 2021.

In the leaked email sent before the agreement, the EPP argued the UK’s impending exit from the bloc on January 31 calls for the rule to be reconsidered as it will primarily benefit the UK.

If open access were to enter into force, UK-based clearing house LCH would be expected to gain the most from being able to crack open Eurex Exchange and clear trades executed on its platform.

“I do believe the idea of open access for exchange-traded derivatives is worthwhile revisiting in light of Brexit. After all, we do not know what the future trading and clearing landscape in Europe and beyond will look like post-Brexit,” says Markus Ferber, an EPP MEP who was the rapporteur on the original Mifid II legislation, in an email to Risk.net.

One more chance

Although the EPP has failed to amend the open access provisions in the crowdfunding legislation, it isn’t the last chance the grouping will have to prevent open access coming into effect.

Market sources widely anticipate the European Commission will undertake a quick and short review of Mifid II this year.

“I would deem it only prudent to extend the derogation and revisit the issue in more detail as part of the Mifid II review process. Delaying the entry into force of the open access provisions for exchange-traded derivatives would also allow the European Commission to conduct a proper impact assessment, taking into account all relevant factors. I believe that would be a smart move in terms of evidence-based policymaking,” says Ferber.

Sources are expecting the European Commission to begin consulting on the review in the first quarter of this year and it is understood that Germany’s Federal Ministry of Finance is pushing for the review to delay or bin the open access requirements.

A position paper, published by the finance ministry in August 2019, argues that Brexit requires the obligation to be reshaped or delayed, as well as warning the untested open access rules present severe risks to financial market stability and liquidity.

The end-user source says they “are now talking to [the European Commission] at the moment to convince [them] that the Mifid II review does not include a review on open access as it will be a tactical mistake. One should only review and consult the market once it [open access] has been triggered.”

For end-users and their clearing members, open access is desirable as a way of improving the efficiency of their collateral management by allowing greater netting of cleared positions.

Even if the European Commission does not include any amendments to the open access rules within their draft proposals of the review of Mifid II, the EPP and Germany’s finance ministry could insert proposals to remove or delay the open access provisions once the Mifid II review is being negotiated within the parliament and council. The eventual outcome would depend on whether German lawmakers can successfully co-opt other EU member states to support the idea of delaying open access.

Update, January 7, 2020: This article was updated to include comments received from Markus Ferber.

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