ESMA review finds good supervision of CCPs’ default management

The European Securities and Markets Authority (ESMA) has issued today the results of a peer review it conducted into how national competent authorities (NCAs) ensure that central counterparties (CCPs) comply with requirements under the European Markets Infrastructure Regulation (EMIR). ESMA’s peer review covered the supervision by NCAs of CCPs’ default management procedures (DMP), including how they simulate the default of a clearing member (fire drills).

Overall, ESMA found that NCAs supervise DMPs adequately and that most EU CCPs have performed fire drills. However, the report also highlights the areas where divergences emerged with respect to NCAs’ supervisory approaches related to reviewing and testing of DMP and fire drills.

It also identifies areas where supervisory convergence could be further enhanced, and highlights existing good practices. A possible case of non-compliance with EMIR was also identified in the area of the frequency of fire drills, which will require further follow-up.

Steven Maijoor, Chair, said: “Central counterparties are important market infrastructures which lie at the heart of financial markets. They play an important role in risk management by guaranteeing that transactions are honored if a party defaults on a trade.

“The role of CCP supervisors is to ensure that CCPs remain resilient at all times by ensuring compliance with regulatory requirements. EU supervision of CCPs needs to be coherent across the Union. Our review helps to ensure that NCAs properly and consistently supervise CCPs and in doing so we identified good supervisory practices and those areas where further convergence is still needed.”

ESMA mapped supervision of EU CCPs

ESMA compared the supervisory approaches of the NCAs supervising the 17 CCPs established in the European Union (EU) at the time of the launch of the review on 1 April 2017. The ESMA review focused on assessing whether the supervisory practices put in place by NCAs to assess the compliance of the CCPs’ DMPs, are effective.

NCAs reviewed DMPs during the authorisation of CCPs or during the validation of changes. However, ESMA found that not all NCAs do systematically review their respective CCPs’ DMP tests and fire drills. ESMA identified certain areas where divergences emerged in NCAs’ supervisory approaches, including:

• The supervision by NCAs of how CCPs manage their reliance on seconded traders, if used; and
• Some NCAs physically attend CCP fire drills while other NCAs are not present.

Recommendations to enhance supervisory convergence

ESMA identified the following areas for improvement in order to enhance supervisory convergence, including:

• CCPs should undertake a regular and comprehensive review of CCPs’ DMP; and
• NCAs should encourage CCPs to perform fire drills unannounced to most of their staff in order to assess the readiness of CCPs. This would allow CCPs to identify more realistically the impact a default may have on time and staffing.

ESMA also identified seven best practices from the responses it reviewed, with a view to promote these supervisory practices across NCAs and CCPs.

Next steps

ESMA will use the findings of this peer review to enhance supervisory convergence between NCAs. ESMA has a coordination role between NCAs and across CCP colleges with a view to building a common supervisory culture and consistent supervisory practices, ensuring uniform procedures and consistent approaches, and strengthening consistency in supervisory outcomes.