MFA and AIMA submitted a joint response to the European Securities and Markets Authority (ESMA) on its discussion paper related to Article 26 of the European Market Infrastructure Regulation, which relates to a regulatory technical standard for central counterparties (CCPs) on the time horizons they use for the liquidation period related to client accounts. In our joint response, MFA and AIMA emphasized that the key priority for the European Commission (Commission) at this time should be ensuring the swift and reciprocal recognition of US CCPs and the determination of equivalence with respect to the CFTC’s clearing rules. Thus, minor differences between the US rules’ requirement that CCPs collect one-day gross margin on cleared trades and the EU rules’ requirement that CCPs collect two-day net margin should not form a barrier to US equivalence. In addition, in our joint response, MFA and AIMA made the following key points:
- The Commission and ESMA should undertake further empirical research to reach definitive conclusions as to the superiority of either one-day gross or two-day net margining;
- For larger clearing members, we expect that more margin would be held at the CCP level if it utilized a one-day gross model, rather than a two-day net omnibus segregation account (OSA) model;
- OSA structures offer stability benefits to the CCP, but we do not believe that the regulatory technical standards (RTS) should make individual segregation account structures less attractive for clients;
- We disagree with the suggested increase of the minimum period of risk (MPOR) for cleared OTC derivatives using net OSA structures, and would instead recommend maximizing flexibility for CCPs to calculate margin as is appropriate to the particular characteristics of the relevant cleared OTC instrument;
- The RTS should not facilitate intraday margin calls becoming standard practice, because such calls should be used only as an emergency tool during stressed market conditions; and
- It would not be practical to oblige each client to maintain arrangements with one or more back-up CMs to guarantee acceptance of its cleared positions should the a CCP need to port the client’s positions to such back-up CM due to the failure of the client’s primary CM. Therefore, instead of introducing such a back-up CM obligation, we recommend that the Commission and ESMA focus on maximizing the likely success of porting through clear and automated processes and practical experience before a CM’s failure.