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Securities clearing and settlement

Securities clearing and settlement

Context

The EU securities framework was completed following the 2008 financial crisis with a set of legislations aiming to improve the safety and efficiency of capital markets and covering clearing and settlement activities (EMIR, CSDR, CCP recovery and resolution framework) and securities financing transactions (SFTR). Rules have also been implemented at the international level in these areas notably with the IOSCO PFMIs. Some issues are however still pending.

How to mitigate the potential risks posed by offshore CCPs to the EU is a long-standing issue in the post-Brexit context with around 90% of cleared euro swaps handled outside the EU. A review of the EMIR 2 framework (EMIR 3) proposed a strengthening of EU clearing in three main areas. First, an enhancement of the competitiveness of the EU clearing ecosystem with measures to streamline administrative procedures and to better reflect the risk-reducing role of CCPs in counterparty credit risk. Second, an improvement of the safety and resilience of the EU clearing ecosystem in the perspective of an increase of EU clearing volumes, with enhanced supervision of EU CCPs and a reinforced EMIR framework. Third, a requirement for EU market participants to clear a portion of substantially systemic products through active accounts at EU CCPs.

In addition, following the stress experienced by some market participants in 2022 in meeting their margin calls for energy derivatives, the Commission included in the EMIR 3 proposal a set of measures to tackle the main sources of stress observed in the energy markets.

The measures proposed include improving the transparency of CCP margin models, broadening CCP eligible collateral in line with the temporary measures put in place during the energy crisis and reviewing requirements to be met by non-financial firms participating in CCPs. Work is also underway at the EU and international levels to address margin procyclicality issues.

In the settlement space amendments adopted to the CSD Regulation (CSDR Refit) aim to ensure more proportionate and effective rules in order to reduce compliance costs and regulatory burdens for CSDs, facilitate their ability to offer a broader range of services cross-border, and also improve their cross-border supervision.

Harmonisation work is also continuing in the post-trading space. A targeted harmonisation of the corporate insolvency framework was proposed in December 2022 in the context of the latest CMU action plan, as well as an enhancement of withholding tax procedures. Discussions are also underway at the European and international levels around settlement efficiency and the opportunity of shortening settlement cycles and moving towards T+1. New technologies such as DLT, cloud computing and AI also have the potential to significantly reshape post-trading activities with further efficiency and integration, although many issues remain to be addressed in terms of scalability and interoperability.

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