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10 NEWS 22.6.2023 CLEARING members based in the Eu- ropean Union stand to lose competitive- ness to international rivals as a result of an emerging divergence between EU and UK rules, according to a senior lobbyist from BNP Paribas. "As a global market participant, very active in the EU, less co-operation and different rules are burdensome. It is an issue for us," said Haroun Boucheta, head of public affairs for securities ser- vices at BNP Paribas, during a panel at the Futures Industry Association's IDX conference held in London on June 20. "Externally it is an issue because it could impact potentially our competitiveness, especially when a rule is built in a dedi- cated zone but that would be applicable only to EU firms," he added, noting that internally the divergence would make his organisation more complex. Proposals for the latest amendments to the European Market Infrastructure Regulation, known as Emir 3.0, include measures that "might create competi- tive issues for EU-based market partici- pants," Boucheta said. He highlighted various rules that could undermine the competitiveness of EU firms conducting business across bor- ders, all of which related to clearing trades at third-country central counter- parties (CCPs). e proposals, published on Decem- ber 7 last year, include the potential im- position of add-ons to banks' minimum capital requirements for any "excessive" exposures to third-country CCPs. "It would mean that in this case of pru- dential measures, EU banks will have their ability to provide services to non- EU clients curtailed," said Boucheta. A related proposal requires firms subject to the clearing obligation to hold active accounts at EU CCPs. Boucheta said this could "encourage competition and en- courage transactions in other CCPs." However, the setting of "rigid" quanti- tative thresholds "could result in a spread between the euro derivatives clearing at EU versus UK CCPs, at the expense of our EU based clients". e issue of setting a quantitative threshold is currently splitting mem- bers of the Council of the EU, according to a leaked document seen by Risk.net. e document, prepared by the current Swedish presidency of the Council and dated June 1, states: "One group seems to prefer some version of an AAR [active account requirement] with a quantita- tive threshold and another group seems only able to consider some version of an AAR without such a threshold." Boucheta added that trades with "non- EU clients and EU clients not subject to Emir should be excluded from its scope". Some member states have raised con- cerns about the overall requirement "mainly regarding the lack of clarity on the impact of the AAR, in particular for EU market participants' competitiveness and potential negative effects for finan- cial stability", according to the leaked document. Both of these proposals are intended to force EU firms to clear their euro-de- nominated interest rate swaps at EU CCPs rather than at the incumbent eu- ro-swaps-clearing-behemoth, UK-based LCH. Speaking on the same panel, Julia Frölich a senior expert for payments and settlement systems at German cen- tral bank Deutsche Bundesbank, said "we need necessary incentives to nudge market participants" to clear trades at EU CCPs, after it had become evident the market would not relocate activity of its own volition. "Large exposures to UK CCPs [are] not sustainable and car- ry financial stability risks. is has to be addressed in the medium term," she added. In stark contrast, Jon Relleen, the di- rector of infrastructure and exchanges at the UK's Financial Conduct Author- ity (FCA), says the UK has been taking greater consideration of the rules in oth- er jurisdictions since the introduction of a mandate for the regulator to consider the international competitiveness of UK markets. "Often one of the big focuses is, if we change these rules and they are differ- ent to other jurisdictions, how does that affect firms?" said Relleen. "We are very conscious of international cross-border firms saying 'we want as much consist- ency as possible in terms of the rulebook for reporting' and things like that, and so that is a big feature now of these discus- sions." Another "huge point" in damaging the competitiveness of EU clearers was the withdrawal of recognition of equivalence for Indian-based CCPs, said Boucheta. A positive equivalence decision is an agreement between two jurisdictions that their rulesets are similar enough to grant firms in one to access services in the other. e bloc's pan-European markets watchdog, the European Securities and Markets Authority, withdrew recogni- tion of equivalence for six Indian CCPs on April 30, which Boucheta said was down to a disagreement on a memo- randum of understanding (MoU) – an agreement facilitating co-operation be- tween authorities – between Esma and Indian supervisors. French supervisors currently permit French bank clearing members to clear trades at Indian CCPs, though members must transition away by October 31, 2024. "It is not linked to the clearing member itself; it is more a question of equivalence and recognition and mutual agreement between authorities," said Boucheta. "Clearly there are some discussions to have in terms of how to avoid that kind of situation." Groundhog day India isn't the only jurisdiction EU clearing banks face being cut-off from, as a deadline looms on allowing EU-based clearers to be members of UK CCPs. Boucheta said "we have absolutely no certainty" on whether the EU will once again extend a temporary equivalence decision allowing EU firms to clear trades at UK-based CCPs, "which is a major point given the importance of UK CCPs in the market". e lapse of equivalence given to UK CCPs has been a recurring showdown between market participants wanting to stay at LCH and the European Commis- sion wanting them to leave. e standoff has seen the EC tempo- rarily extend the deadline – equivalence currently granted to UK CCPs is set to expire in June 2025. Dramatically with- drawing equivalence to UK CCPs pre- sents risks to financial stability, given the amount of cleared trades EU members have sitting at LCH that would have to be moved en masse. e measures laid out in Emir 3.0 are intended to lure away some activity, which some suspect could then make a withdrawal of equivalence more likely. It is doubtful the EU will be able to im- plement the measures in Emir 3.0 and snatch away activity in two years' time. e signing of an MoU between the UK Treasury and EC on May 19 has sparked some hopes of closer co-operation and ultimately positive equivalence decisions between the two jurisdictions. T he MoU states the arrangement will provide for "transparency and appropri- ate dialogue in the process of adoption, suspension and withdrawal of equiva- lence decisions". Relleen of the FCA gave little hint of optimism on an agreement, answering "let's see" to a question on whether there is more confidence of a permanent equivalence decision being struck. "From the UK's point of view, one of the things that we are keen to emphasise: we are certainly not putting any obstacles or barriers in the way of that happening," he said. Raft of EU clearing changes is self- defeating – BNPP lobbyist Diverging rules between EU and UK starting to threaten EU firms' competitiveness

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