On January 18, 2017, the EBA and ESMA published a Report on the joint functioning of the CRR and EMIR. The focus of the Report is on capital requirements for CCPs that also hold a banking license, leverage and liquidity for CCPs, large exposures, difference in application of the margin period of risk and the requirements on a client's exposures to clearing members.

The EBA and ESMA note that although the EMIR and CRR requirements may appear to be redundant for CCPs holding a bank license, because some aspects of the EMIR requirements are more stringent, they are in fact based on different definitions of capital and take into account different types of risks. Therefore, CCPs holding a banking license are subject to both capital requirements as a matter of principle, with some exemptions when they are properly justified. There are currently 17 authorized CCPs, of which three hold a banking license—Eurex Clearing AG, LCH Clearnet SA and European Commodity Clearing AG.

The EBA and ESMA conclude that the application of CRR capital requirements to CCPs holding a bank license can lead to duplicative requirements for CCPs. The EBA and ESMA recommend that the treatment of CRR capital requirements for exposures already covered by EMIR financial resource requirements should be clarified by exempting those CCPs from (i) certain requirements on credit risk, counterparty credit risk and market risk exposures; and (ii) the requirements on exposures to CCPs where an interoperability arrangement is established.

The EBA and ESMA consider that the application of the Leverage Ratio is problematic as it would constrain activity, but have taken the view that international consistency is a key concern and that it is important to wait until conclusions have been reached at the international table before the EU regime is amended. This is despite the EBA stating in separate reports that an exemption would be appropriate for CCPs in relation to NSFR and LR.

The EBA and ESMA note that the large exposure requirement does not currently pose any limitation to a CCP's activity (due to the exemption provided for clearing and settlement) and given that the framework is currently under review by the Commission, the issue is not further developed in the Report.

The Report also compares the application of the MPoR under the CRR with that of the liquidation periods (which are conceptually similar to the MPoR) in EMIR. The EBA and ESMA do not suggest any changes to the MPoR in the CRR concerning the treatment of a clearing member's exposure to clients.

The Report finally considers clients' exposures to clearing members under both the CRR and EMIR framework. The CRR requires that four conditions must be met for the two percent risk weight to apply: segregation, portability, independent legal opinion and qualified CCP. The EBA and ESMA have recommended that the Commission clarify the wording in the CRR regarding the segregation, portability and legal opinion requirements. The proposals to amend the CRR published by the Commission in November 2016 include revisions to the treatment of client exposures. In particular, the draft legislation replaces the requirement for a legal opinion with a requirement for the client to carry out a sufficiently thorough legal review. However, there is no guidance in the draft legislation as to what this will actually mean in practice and although a legal opinion may no longer be needed, the underlying analysis to be conducted remains broadly similar. The EBA and ESMA do not refer to the Commission's proposed amendments on CCP exposures.

The Report is available at: http://www.eba.europa.eu/documents/10180/1720738/Report+on+the+interaction+with+EMIR+%28ESAS-2017-82+%29.pdf ; and the Commission's proposals to revise CRD IV are available at: http://finreg.shearman.com/european-commission-proposes-draft-quotcrd5quot-a.

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