EBF advisor: Jacopo Borgognone
Publication date: 2 December 2019
The EBF fully supports the opportunity to comment on the proposal for a specification of the conditions under which the commercial terms under which clearing services are provided are to be considered to be fair, reasonable, non-discriminatory and transparent (FRANDT-requirements).
These requirements need to strike the right balance between the interest of clients in having unfettered access to clearing services on the one hand and the interests of clearing service providers. For example, as concepts such as reasonableness and fairness can only be assessed in relation to the prevailing market conditions, which can change over time, rendering FRANDT requirements unfit for purpose if they are calibrated too restrictively. This would likely also increase unnecessarily compliance costs, and it should be taken into account when drafting the rules.
The consultation paper generally recognises this by addressing both the difficulties clients may face in getting access to clearing services and the considerable challenges and costs
associated with establishing client clearing services. Again, it should be noted in this context that, apart from the factors mentioned under Section 4 of the Consultation Paper (in particular paragraph 23 to 27), the burdens associated with the constantly expanding complex regulatory requirements also work as a significant disincentive to establish or
expand client clearing services.
On this delicate basis, any decreased access to clearing as a result of additional regulation should be avoided. In this, the EBF is convinced that the FRANDT-requirements should be carefully calibrated as to ensure a meaningful addition to the existing requirements for the provision of clearing services.
Another central aspect in this connection is the mitigation and management of the risks associated with clients and client positions. As effective and efficient risk management is of paramount importance, institutions will always need to perform a risk assessment exercise before considering whether to offer or expand client clearing services and assessing under what conditions these services to existing or new clients should be offered.
It is also important that the FRANDT-rules do not result in a price regulation or an obligation to contract (cf. Recital 11 of EMIR Refit).
Furthermore, it should be taken into account that the conditions under which client clearing services can be provided are, to a considerable extent, determined by the relevant central counterparties (CCPs).
Having said this, we concur with the proposals made in the Consultation Paper to some extent.
However, certain aspects raise some concerns and should be reviewed in order to ensure that the FRANDT-requirements will ultimately achieve the intended purposes – thus facilitating the access to clearing services and encouraging institutions to offer client clearing services.
• Before adopting new delegated acts that would specify the conditions under which commercial terms in clearing agreements are considered to be fair, reasonable, non-discriminatory and transparent, the EBF believes that an assessment of the real impact of additional rules should be made, in particular considering whether further rules are needed in addition to the level 1 rules set out under EMIR.
• It should be taken into consideration how the introduction of such deeply prescriptive client classification criteria could negatively impact the service providers’ ability to correctly apply their risk management policies. In fact, certain proposals would require changes to these frameworks with the consequence that clearers would have to unwillingly assume certain risks, affecting their participation in the clearing market, even leading to market-exit.
• Requirements regarding the contractual documentation used in connection with client clearing services, in particular the proposal to require the institutions to publish the contractual agreements even where these are standard industry documentations (here, a reference to such standard documents should be entirely sufficient and would be clearly more appropriate) and
• The requirement to include applicable statutory requirements in the contractual agreement itself.