MiFID II open access to CCPs called into question

MiFID II may introduce new risks for CCPs

As the European Commission’s MiFID II legislation moves towards implementation of technical standards, some of Europe’s national regulators are seriously worried that mandatory open access to CCPs may not be such a good idea. Concerns about the ability to manage risk and the ability to effectively handle data were highlighted by speakers at the IDX FIA conference in London yesterday.

“A CCP must be able to contain all the risks it is introducing,” said Sander van Leijenhorst, senior supervision officer, Netherlands Authority for the Financial Markets. “The whole point is to mitigate risk. If there is a regulatory requirement to provide access to a venue, but the CCP can’t mitigate the risk from that venue, that’s not good. Forcing the entire industry to access each other’s infrastructure is not good if it means that CCPs can’t mitigate the risk.”

Under MiFID II, trading venues and clearing houses will have to open up to any participant that meets the minimum criteria. The rules are intended to introduce a level playing field for securities trading and clearing in Europe – but opinion is divided about whether CCPs are sufficiently robust to handle a potential crisis.

To make matters worse, between MiFID II and EMIR, which focuses on derivatives, market participants will have to gather and submit vast quantities of data about their trading activity. While originally intended to bolster transparency and prevent a rerun of the financial crisis, some participants are concerned about the viability of the new rules, particularly given their enormous scope.

“It is not evident that EMIR trade repository data will be sufficient for the role originally envisaged by the G20,” said Stefan Pankoke, director, division for OTC derivatives markets supervision at German securities regulator BaFin. “Given the complexity of MIFID II, regulators will have to struggle with a tremendous range of products, including some more liquid and some less so, presenting an enormous challenge to every regulator in Europe.”

According to Patrice Aguesse, head of market regulation, policy division at France’s Autorité des Marchés Financiers , there is a need for segregated accounts under EMIR, but the immediate priority will be the shift to the transparency requirements for bonds and derivatives transparency.

“We need an overview of what’s happening,” he said. “It’s not easy. We have to rethink the way bank resolution is done. It’s not easy because there are so many things that interact, including the conflict of laws. We are working on it.”

However, according to van Leijenhorst, the real issue is CCP resolution. Extending the default waterfall by increasing margins and default fund margin is in effect just making a bigger CCP, he said, which is different from asking what will happen if the waterfall ends.

“There’s always a scenario where the margins are gone, and now you have to allocate a loss,” he said. “In the end of the line, how do we allocate losses? You need a range of tools to do it. To say up front ‘Do it this way’ – well I am not sure that’s a good idea. We need as wide a range of tools as possible.”