Brussels, 7 December 2022
The European Commission has today put forward measures to further develop the EU’s Capital Markets Union (CMU):
- to make EU clearing services more attractive and resilient, supporting the EU’s open strategic autonomy and preserving financial stability.
- to harmonise certain corporate insolvency rules across the EU, making them more efficient and helping promote cross-border investment.
- to alleviate– through a new Listing Act–the administrative burden for companies of all sizes, in particular SMEs, so that they can better access public funding by listing on stock exchanges.
Clearing
The EU needs safe, robust and attractive clearing for a well-functioning CMU. If clearing does not function efficiently, financial institutions, companies and investors face more risks and higher costs –as the 2008 financial crisis showed.
Today’s proposed measures will:
- Make our clearing landscape more attractive by enabling central counterparties (CCPs) – which provide clearing services – to expand their products quicker and easier, and by further incentivising EU market participants to clear and build liquidity at EU CCPs.
- Help build a safe and resilient clearing system, by strengthening the EU supervisory framework for CCPs and drawing lessons from the recent developments in energy markets caused by Russia’s aggression against Ukraine. For example, by increasing the transparency of margin calls, so that market participants (including energy firms) are in a better position to predict them.
- Reduce excessive exposures of EU market participants to CCPs in third countries, particularly for derivatives identified as substantially systemic by the European Securities and Markets Authority. Today’s proposal requires all relevant market participants to hold active accounts at EU CCPs for clearing at least a portion of certain systemic derivative contracts. This will improve the management of financial stability risks in the EU.
Corporate insolvency
Each Member State has a different insolvency regime. This is a challenge for cross-border investors who have to consider 27 different sets of insolvency rules when assessing an investment opportunity.
Today’s proposal will:
- Harmonise specific aspects of insolvency proceedings across the EU. For example, it includes rules on:
- actions to preserve the insolvency estate (i.e. avoiding actions by debtors that would reduce the value that creditors can get);
- creditors’ committees to ensure a fair distribution of the recovered value among creditors;
- so-called “pre-pack” proceedings (i.e. where the sale of the business is agreed before the insolvency starts);
- and the duty on directors to timely file for insolvency to avoid that the value of the company deteriorates.
- Introduce a simplified regime for microenterprises to lower the costs of winding them down and to enable the companies’ owners to be discharged from debt, granting them a fresh start as entrepreneurs.
- Require Member States to produce an information factsheet, summarising the essential elements of their national insolvency laws to facilitate decisions by a cross-border investor.
These measures will foster cross-border investment across the Single Market, lower the cost of capital for companies, and ultimately contribute to the EU’s CMU. Overall, the benefits of the proposal are expected to exceed €10 billion annually.
Listing Act
Companies today face significant requirements when listing on public markets. For example, the length of prospectus documents can reach up to 800 pages.
Today’s proposed amendments will:
- Simplify the documentation that companies need to list on public markets, and streamline the scrutiny processes by national supervisors, thereby speeding up and reducing the costs of the listing process whenever possible. For example, it is estimated that EU listed companies will save approximately €100 million per year from lower compliance costs, with companies saving €67 million per year from simpler prospectus rules alone.
- Simplify and clarify some market abuse requirements, without compromising market integrity.
- Help companies be more visible to investors, by encouraging more investment research especially for small and medium sized companies.
- Allow company owners to list on SME growth markets using multiple vote share structures, so that they can retain sufficient control of their company after listing, while protecting the rights of all other shareholders.
These measures will further develop the CMU by cutting unnecessary red tape and costs for companies. This will encourage companies to get and remain listed on the EU capital markets. Easier access to public markets will allow companies to better diversify and complement available sources of funding.
Further details and next steps
The clearing package consists of:
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- a Communication;
- a Regulation amending the European Market Infrastructure Regulation (EMIR), the Capital Requirements Regulation (CRR) and the Money Market Funds (MMF) Regulation;
- a Directive amending the Capital Requirements Directive (CRD), Investment Firm Directive (IFD), and the Directive on Undertakings for Collective Investment in Transferable Securities (UCITS).
The listing package consists of:
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- an amending Regulation amending the Prospectus Regulation, Market Abuse Regulation and the Markets in Financial Instruments Regulation,
- an amending Directive amending the Markets in Financial Instruments Directive and repealing the Listing Directive, and
- a Directive on multiple-vote shares.
- The corporate insolvency package consists of:
- a Directive on corporate insolvency.
The six respective legislative proposals will now be submitted to the European Parliament and the Council for adoption.
For more information
Clearing
Capital Markets Union Package-Documents
Corporate Insolvency and Listing Act
Capital Markets Union Package-Documents
Quotes
There is no better time to help Europe’s companies access different sources of finance, so they can grow and innovate, create jobs and attract investment. This has always been the goal of the Capital Markets Union. We have made good progress but can do more. So today, we are making it even easier for companies to list on stock exchanges, giving them more funding choices. We are also improving the EU’s clearing system: the market infrastructure that capital markets need to function efficiently. More alignment of national rules on corporate insolvency will boost cross-border investment. This also comes with simpler procedures for micro-businesses. Today’s package is another step forward to strengthen Europe’s economy and to sustain our long-term growth.
Insolvency regimes vary widely across the EU. Not only does this situation cause legal uncertainty and hinder investments across EU borders, it also leads to excessive recovery times and high judicial costs. The new rules will ensure a level playing field – supporting investors, promoting free capital movement and strengthening the market by laying down common safeguards and standards, fit for the digital age.
“Today we are taking three big steps on the road towards the Capital Markets Union. First, on clearing, we’re building capacity of market infrastructures in the EU, while keeping our markets open. Our proposal will support EU capital markets, provide companies with more clearing options and maintain financial stability. It will also address issues that have emerged in the clearing of derivatives by energy companies in light of the current challenges they are facing. Second, on listing, we’re making it easier for companies to access more types of funding – reducing the costs and the paperwork for companies that want to list on EU stock markets. Third, on insolvency, we’re acting to break down one of the biggest barriers between national markets. Our proposal will give investors more certainty about how long insolvency proceedings could take and how much value they would recover – making them more likely to invest in companies in a different Member State. Together, these three steps will bring us closer to completing the Capital Markets Union.
Source – EU Commission
Q&A: EU Commission’s proposals on corporate insolvency and listing
Brussels, 7 December 2022
CORPORATE INSOLVENCY
Why is the Commission proposing a targeted harmonisation of insolvency proceeding rules?
Today’s initiative, announced in the Capital Markets Union Action Plan of September 2020, is part of the Commission’s priority to advance the Capital Markets Union (CMU). The lack of harmonised insolvency regimes has long been identified as one of the key obstacles to the freedom of capital movement in the EU and to greater integration of the EU’s capital markets. Today’s proposal aims at harmonising targeted elements of Member States’ insolvency rules and at creating common minimum standards across all Member States, thereby facilitating cross-border investment.
Member States’ different starting points, legal traditions and policy preferences imply that reforms at national level in this area are unlikely to lead to a convergence of insolvency systems. Action at EU level is, therefore, needed to reduce this fragmentation.
What specifically is the Commission proposing?
The proposal aims to accomplish convergence in three key dimensions of corporate (non-bank) insolvency law: (i) ensuring that creditors can recover the maximum value from the liquidated company, (ii) the efficiency of insolvency procedures and (iii) the predictable and fair distribution of recovered value among creditors.
1. Maximising the recovery value of the liquidated estate
Today’s proposal introduces a minimum set of harmonised conditions across the EU to ensure that debtors do not reduce the value that creditors can get. It will also introduce conditions on asset traceability by improving insolvency practitioners’ access to asset registers, including in a cross-border setting. This is combined with the possibility of maximising the recovery value of the business at an early stage through ‘pre-pack’ sales (i.e. a planned insolvency procedure where the assets are sold to a designated purchaser) and an obligation on company directors to file for insolvency without undue delay to avoid potential asset value losses for creditors.
2. Enhanced procedural efficiency
The proposal also sets up rules for a simplified winding-up procedure for insolvent microenterprises. For those small companies, the cost of ordinary insolvency procedures is often prohibitively high. The new rules will ensure that microenterprises, even those with no assets, are wound up orderly, in a fast and cost-effective procedure. This will also ensure that entrepreneurs can have a debt discharge at the end of the procedure. To accomplish this, as a rule, no insolvency practitioner should be appointed (as this is an additional cost), the debtor should remain in possession of the assets and of the day-to-day operation of the business throughout the procedure and the residual value of assets should be realised through an electronic auction system.
3. Fair and predictable distribution of recovered value
Today’s proposal sets out how creditors’ interests can be represented in “creditors’ committees.” Creditor committees are a key tool to protect the interests of all creditors. The proposal sets out conditions for such committees to be created and minimum harmonisation rules in relation to key aspects, such as the appointment of the members and the composition of the committee, the working methods, the rights and functions of the committee, as well as the personal liability of its members.
What is this proposal changing?
The corporate insolvency proposal:
- Harmonisesconditions for “transaction avoidance”.This will protect the insolvency estate by clawing back assets that were wrongfully disposed of prior to the opening of insolvency proceedings (e.g. if a debtor makes a donation to a friend just before insolvency proceedings);
- Makes it easier to trace assets across bordersby facilitated insolvency practitioners’ access to asset registers;
- Allows for the preparation and negotiation of the saleof the debtor’s business before the formal opening of the insolvency proceedings (‘pre-pack’). This will help prevent the quick deterioration of the value of the company (‘melting ice cube effect‘);
- Requires directors to file for insolvencywithout undue delayto avoid potential asset value losses for creditors (‘zombie firms‘);
- Provides simplified procedures for insolvent microenterprises,hence reducing the costs of the proceedings and guaranteeing an orderly liquidation;
- Improves representation of creditors’ interests through creditors’ committees;
- Makes key features of national insolvency regimes, including insolvency triggers and the ranking of claims,more transparent for creditors to reduce the cost for cross-border investors to search the information.
What will be the impact on firms?
With more harmonised EU rules, companies – especially SMEs and those operating in a cross-border context – will benefit from more uniform conditions. This means that investors will be encouraged to invest cross-border, resulting in more funding for companies, including SMEs.
Today’s proposal introduces incentives for insolvent companies to act in a timely manner. In addition, insolvent companies will have the opportunity to sell parts of their business as a going concern (i.e. a company that is financially stable enough to meet its obligations and continue its business for the foreseeable future).
By increasing expected recovery rates for creditors and investors, the proposal seeks to reduce the perceived risk of investing in SMEs and other companies. This should lead to lower funding costs. By giving microenterprises the possibility to start insolvency proceedings, this proposal ensures that they benefit from access to orderly liquidation and the possibility to start afresh.
What is the objective of the insolvency regime for microenterprises?
National insolvency rules do not always treat insolvent microenterprises in a proportionate manner. The cost of ordinary insolvency procedures is often prohibitively high for small companies, which currently cannot benefit from orderly liquidation and debt discharge for their entrepreneurs.
Today’s proposal sets up rules for faster, simpler, and affordable procedures for insolvent microenterprises, allowing all microenterprises to commence proceedings to address their financial difficulties independent of their ability to cover the ensuing administrative costs. The new rules will ensure that microenterprises, even those with no assets, are wound up orderly, in a fast and cost-effective procedure. A special insolvency regime for microenterprises will reduce the judicial costs compared to the judicial costs of ordinary proceedings and ensure that entrepreneurs can obtain debt discharge at the end of the procedure.
To accomplish this, the proposal allows Member States to entrust the conduct of the proceedings to a competent authority which is either a court or an administrative body. The Commission proposes short deadlines and minimises formalities for all procedural steps, including for the opening of the proceedings, the lodgement and the admission of claims, the establishment of the insolvency estate and the realisation of assets. The debtor should remain in control of its assets and day-to-day operation of the business as a rule, and insolvency practitioners would only be appointed in exceptional cases. Member States should ensure that the assets of insolvent microenterprises can be realised through electronic public auctions to maximise their value.
What will be the benefits for creditors?
Creditors will benefit from expected higher value recovery. Creditor committees will also allow them to coordinate their decisions more effectively.
Furthermore, creditors stand to benefit from improved tools for value recovery not only in insolvency, but also long before it – notably when making their decision to invest. Since the more efficient and aligned rules around value recovery would increase creditors’ confidence to obtain better or fairer access to the debtor’s assets in case of insolvency, they allow for more certainty in assessing the cost of capital against which credit is granted. When these rules are more aligned across Member States, creditors who give a loan to a debtor in another Member State will find it easier to evaluate the impact of, for example, transaction avoidance law of another Member State (compared to their own).
Cross-border creditors will further benefit from higher transparency on key characteristics of insolvency regimes and ranking of claims, which is expected to significantly reduce “information and learning costs” related to decision-making in cross-border investment.
LISTING ACT
What is the Commission proposing and why?
A core aim of the CMU is to improve the access to market-based sources of financing for small and large firms. This would help them grow and diversify their funding, which is particularly important for small and medium-sized enterprises (SMEs) that rely excessively on bank financing.
Since the first CMU Action Plan in 2015, it has become easier and cheaper for companies and in particular SMEs to access public markets. Stakeholders continue, however, to argue that further regulatory actions need to be considered to streamline the listing process and to achieve a more proportionate regulatory treatment of, in particular, smaller companies.
Today’s proposal follows up on the Commission’s commitment to simplify EU listing rules, as detailed in Action 2 of the 2020 CMU Action Plan.
It aims to:
- Alleviate and render more proportionate the requirements that apply both at the moment of listing and when listed;
- Preserve a sufficient degree of transparency, investor protection and market integrity;
- Address the issue of fragmentation in national laws that restricts the flexibility of companies to issue multiple-vote shares. This is important for founders of some companies to retain control and continue with their vision of the company, also after going public.
What elements make up today’s package?
The package contains amendments to the Prospectus Regulation, the Market Abuse Regulation and targeted changes to the Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR). It also repeals most requirements in the outdated Listing Directive, transferring the few provisions that are still relevant to MiFID II. Finally, it puts forward a new proposal for a Directive on Multiple-vote rights, to encourage entrepreneurial companies, including small and medium sized ones, to list for the first time on SME growth markets with a governance structure that allows them to maintain control over the vision of the company.
Who will most benefit from the proposed measures?
The initiative aims at simplifying the listing rules for companies that want to list on public stock exchanges. These companies will benefit from a more cost-efficient regulatory regime. For example, it is estimated that EU listed companies will save approximately €100 million per year from lower compliance costs, with companies saving €67 million per year from simpler prospectus rules alone. Companies, in particular smaller ones, will also be able to benefit from the possibility to list with a more flexible governance structure. The new proposal on multiple-vote shares will allow founders and owners to enjoy the benefits of being listed while maintaining control over the long-term vision of their company. The initiative would also foster investment research, especially for SMEs.
How will the changes to the Prospectus Regulation help more companies list?
Today, companies that want to list their securities on public markets face significant costs when it comes to drawing up a prospectus (which can be up to 800 pages long).
Today’s package contains important alleviations for both first-time issuers – including SMEs, who will benefit from shorter and more streamlined prospectuses – and issuers tapping public markets repeatedly, who will be exempted from the obligation to draw up a prospectus when issuing “more of the same” securities, provided that certain conditions are fulfilled. By streamlining prospectuses, we will also ensure a focus on what is relevant for investors to avoid information overload and to allow them to make well-informed investment decisions.
The proposed measures will also aim to improve the efficiency of the scrutiny and approval of prospectuses by national competent authorities in order to make that process shorter and more predictable.
Market Abuse Regulation (MAR): will the targeted changes not lead to less market integrity?
No, the proposed changes aim at striking the right balance between reducing the administrative burden for issuers and safeguarding market integrity.
These targeted revisions of the market abuse framework will reduce legal uncertainty around the interpretation of requirements on the disclosure of inside information. The disclosure regime would, therefore, become more predictable from the investors’ point of view and more conducive to effective price formation, while reducing the complexity for issuers. In addition, a more proportionate sanctioning regime for SMEs for disclosure-related infringements would avoid discouraging smaller issuers from listing or remaining listed on trading venues.
The proposal also reinforces the capacity of market authorities to carry out their supervisory tasks. On the one hand, it strengthens the capacity of supervisors to monitor markets by creating a mechanism to exchange among market authorities order book data (cross-market order book data surveillance). This system will enrich the market abuse supervisory toolbox in the context of the further integration of European markets. On the other hand, the proposal provides for a strengthened role for ESMA in the field of cooperation among market authorities and exchange of information. These measures will ensure greater market integrity and enhance investor confidence.
Multiple-vote shares: how did you balance the need to encourage entrepreneurs to list, while protecting all investors on capital markets?
The proposal requires all Member States to allow companies to use multiple-vote shares when they list for the first time on SME Growth Markets. Multiple-vote share structures are a type of control-enhancing mechanism that allows company owners to retain decision-making power in a company while raising funds on public markets. They typically include at least two separate classes of shares with a different number of voting rights. Currently, not all Member States allow companies to list with multiple-vote shares. This proposal would allow all companies across the EU to list for the first time on SME Growth Markets with such shares, also promoting the importance of SME Growth Markets.
The introduction of multiple-vote share structures is accompanied by the inclusion of safeguards to protect the interests of minority shareholders and of the company. These safeguards require all Member States to ensure that any decision to adopt a multiple-vote share structure, or to modify that structure where there is an impact on voting rights, is taken by a qualified majority at the general shareholders’ meeting. The safeguards set out in this proposal also introduce a limitation on the voting weight of multiple-vote shares by introducing restrictions either on the design of the multiple-vote share structure or on the exercise of voting rights attached to multiple-vote shares for the adoption of certain decisions. Investors would therefore enjoy sufficient protection across the EU when investing in companies with multiple-vote share structures.
Investment Research: Why is it necessary to amend the rules on investment research?
Companies considering an IPO, as well as listed companies, need to make themselves known to potential investors. Small and medium sized companies, however, suffer from a low level of investment research. This results in low visibility and low investor interest.
While the unbundling rules introduced by MiFID II were designed to break the link between brokerage commissions and investment research, they have actually exacerbated the negative trend in research coverage for small and medium firms and have not led to the emergence of independent, SME-focused research providers.
In 2021, the unbundling rules were first amended under the Capital Markets Recovery Package (CMRP) as part of the Commission’s response to the COVID-19 crisis. It sought to improve SME research coverage by allowing a joint payment for trade execution and investment research for those issuers whose market capitalisation does not exceed €1 billion. This measure was widely welcomed.
However, it did not sufficiently address the problem. As many investment firms and brokers offer services to companies of varying sizes (and capitalisation), including those exceeding capitalisation of €1 billion, these investment firms and brokers decided against introducing two parallel systems for research invoicing (one for the large cap (blue chip) companies and another one for the other companies), maintaining the unbundled approach for all clients.
Therefore, the amendment in the CMRP did not fully reach its objective to support the production of the SME research. As a result, the Commission is further amending these rules. The main changes include a higher threshold of market capitalisation below which the unbundling rules do not apply, so that firms providing SME research can bundle the price of the research with that of the brokerage services. Another significant change is the introduction of a code of conduct to support issuer-sponsored research, in order to increase its reliability.
How do the proposals fit into the Commission’s wider work to support SMEs?
Today’s proposals fit into wider ongoing work to support SME access to public markets.
For example, (i) the creation of an EU Single Access Point (ESAP) that will tackle the lack of accessible and comparable data for investors, making companies more visible to investors, (ii) the centralisation of EU trading information in a consolidated tape for a more efficient public market trading landscape and price discovery, (ii) the introduction of a debt-equity bias reduction allowance (DEBRA) to make equity financing more attractive (and less costly) for companies.
Furthermore, other Commission initiatives will further strengthen the investor base for listed equity. The EU SME IPO (Initial Public Offering) Fund will play the role of an anchor investor to attract more private investment in SMEs’ public equity by partnering with institutional investors and investing in funds focused on SME issuers. The Capital Requirements Regulation’s and Solvency II reviews will increase the investor base for issuers by facilitating investments from banks and insurance companies in public (long-term) equity. These changes in prudential regulation are introduced in addition to already existing measures, such as the SME supporting factor, which allows for a more favourable prudential treatment of certain exposures to SMEs with a view to incentivise banks to prudently increase lending to SMEs.
In addition, today’s package will also be an important contributor to the implementation of theNew European Innovation Agenda, particularly its flagship area on funding for deep tech scale-ups, as announced by the Commission in July 2022. The focus on SME growth markets and the proposal on multiple-vote shares is much welcomed by EU research and innovation stakeholders, such as tech scale ups and innovative companies backed by venture capital, as it provides further incentives to access capital markets and offer an improved exit route for venture capital investors.
Q&A: EU Commission’s new proposals to make clearing services in the EU more attractive
Brussels, 7 December 2022
What are central counterparties (CCPs)?
A central counterparty (CCP) is an entity that reduces systemic risk and enhances financial stability by standing between the two counterparties in a derivatives contract (i.e. acting as buyer to the seller and seller to the buyer of risk). A CCP’s main purpose is to manage the risk that could arise if one of the counterparties defaults on the deal. Central clearing is key for financial stability by mitigating credit risk for financial firms, reducing contagion risks in the financial sector, and increasing market transparency.
What is the Commission proposing today?
Today’s proposal amends the European Market Infrastructure Regulation (EMIR) and makes targeted amendments to the prudential frameworks for banks (the Capital Requirements Regulation, the Capital Requirements Directive) and for investment firms (the Investment Firms Directive) as well as to the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive and the Money Market Funds (MMF) Regulation.
The aim of today’s package is:
- To encourage clearing in the EU and to improve the attractiveness of EU CCPs by simplifying the procedures for CCPs when launching new products and changing risk models. It does so by introducing a non-objection approval for certain changes that do not increase the risks for the CCP. This will allow EU CCPs to offer new products for clearing and introduce model changes more quickly, therefore making EU CCPs more attractive, while ensuring adequate risk considerations are upheld and without endangering financial stability. For example, a CCP would like to request an extension of services to add a new EU currency to a class of financial instruments already covered by its existing authorisation. In the past, it would have needed to go through a full authorisation process (taking between months and up to two years in certain cases). Under today’s proposal (for the non-objection procedure), the CCP will be informed within 10 working days if the competent authority objects to such extension.
- To make EU CCPs more resilient and to draw the lessons from recent developments in energy markets by further enhancing the existing supervisory framework. This will ensure risks to the EU’s CCPs continue to be mitigated in light of new challenges and that the EU’s central clearing system continues to be able withstand economic shocks.
- To strengthen EU open strategic autonomy and safeguard financial stability by requiring clearing members and clients to hold, directly or indirectly, an active account at EU CCPs, and reduce excessive reliance on systemically important third-country CCPs.
Why is the proposal needed?
Today’s package aims to improve the central clearing system in the EU, making EU CCPs more efficient and attractive. It addresses the vulnerabilities that stem from the current excessive reliance on certain third-country CCPs deemed to be substantially systemic for the EU, ensuring that the EU has a competitive and efficient clearing system that is safe and resilient.
The Commission, as well as the European Securities Markets Authority (ESMA), have previously expressed concerns about the possible financial stability risks associated with the excessive reliance of EU financial markets on a few CCPs based in the UK. The Commission has repeatedly invited market participants to reduce their excessive reliance to such CCPs.
In addition, the energy crisis has affected the real economy in the EU and had ramifications on certain areas of financial markets, including clearing. This crisis brought to light the difficulties certain energy firms are facing in order to meet CCP margin calls.
What impact will it have?
Overall, the proposed measures will have a positive impact by:
- improving the attractiveness of EU CCPs;
- safeguarding EU financial stability in the EU and in a cross-border context, reducing the excessive reliance on third-country CCPs; and
- ensuring safe, robust and competitive post-trade arrangements, in particular central clearing, further strengthening CMU and contributing to deep and liquid EU capital markets.
EU CCPs will benefit from being able to quickly bring new products to the market and consequently meeting the demands for new clearing offers by clearing members and clients. In addition, they will be able to adapt the models they use to measure the risks they face more quickly, allowing a timely management of such risks.
Clearing members (mainly banks) will benefit from extended, faster clearing offers by CCPs, thereby providing more choices on where to clear.
Clients – such as non-financial corporates or financial market participants – will benefit from:
- more transparency on margin models and collateral requirements;
- information on where to clear certain contracts that can be cleared both at a third-country CCP and at an EU CCP; and
- the possibility to use bank and public guarantees.
What will be the impact for corporates?
Corporates will benefit from the measures aimed at making central clearing safer, including:
- the proposed measures to increase the transparency of CCPs’ margin calls will make it easier to predict margin calls and prepare how to meet such requests.
- the provisions concerning the calculation of the clearing thresholds will be reviewed to take into account the concerns expressed in the past months by firms, in particular firms active in commodity derivatives, to better reflect, where needed, different types of commodities, and should improve their situation in terms of the clearing thresholds without endangering financial stability.
At the same time, corporates will need to meet robust requirements if they want to become direct clearing members at a CCP, as the lack of intermediation by a financial firm such as a bank could leave them exposed to liquidity risks due to collateral requirements that can be volatile in a stressed situation.
In addition, corporates will be subject to reporting requirements related to their intragroup trades, to allow authorities to have a comprehensive picture of their activities as proposed by ESMA in its recent letter to the Commission.
What are the elements of the package that respond to the energy crisis?
The package includes the following main measures to improve the framework following the recent energy crisis:
- improved transparency of CCPs’ margin models;
- improved CCP participation requirements to be met by corporates;
- broadening of CCP eligible collateral to include public guarantees and bank guarantees;
- reporting requirements on the intragroup derivative exposures of corporates;
- improved calculation and review of the clearing thresholds;
- greater consideration of the impacts of intraday margin calls by CCPs and greater focus on avoiding procyclical collateral haircuts;
- revision of the hedging criteria to ensure they remain appropriate in light of market developments.
What will happen to firms that are under the clearing obligation?
Under the proposal to amend EMIR, firms subject to the clearing obligation will be required to clear at least a portion of certain systemic derivatives through active accounts at EU CCPs. Such derivatives refer to the types of derivatives identified by ESMA in their report (ESMA report on UK CCPs, 2021) issued last year, as of substantial systemic importance to the EU or to one or more Member States, under Article 25 (2c) of EMIR. The specific derivatives are the following:
- Interest rate derivatives denominated in euro and Polish zloty
- Credit default swaps
- Short-term interest rate derivatives denominated in euro
The requirement to clear such specific derivatives in an EU CCP can be met via accounts opened directly at an EU CCP or indirectly through a clearing member, depending on the clearing arrangements in place and will be further specified through regulatory technical standards.
It is expected that firms subject to this requirement will have to bear some costs, due to the loss of some netting benefits, reduced collateral optimisation and some (limited) additional operational costs due to maintaining several accounts in the EU and in third-country CCPs. At the same time, several EU market participants already have accounts at CCPs in the EU, so the additional costs for them would be negligible.
To take those potential impacts into account, the proposal envisages:
- First, to ensure a proper calibration of the levels of activity that will be required in the EU active accounts and an effective outcome that also minimises the cost for the entities subject to the obligation.
- Second, ESMA will need to calibrate the required level of activity, taking into account the possible impacts on competitiveness of EU market participants and the need for an effective, yet balanced and proportionate, level of activity.
How does the active account requirement work?
All financial and non-financial counterparties subject to the clearing obligation under EMIR will be required to hold accounts, directly or indirectly, at CCPs established in the EU. They will need to clear there at least a certain portion of the derivative contracts that were identified by ESMA as of substantial systemic importance for the financial stability of the EU or one or more of its Member States.
How does the active account requirement take into account the impact on the competitiveness of EU market participants?
The Commission proposal seeks to ensure that the calibration of the minimum level of clearing activity that needs to be maintained in accounts at EU CCPs is proportionate and can be adapted to changing circumstances.
In this regard, ESMA in cooperation with the EBA, EIOPA and the ESRB, and after having consulted the European System of Central Banks, is entrusted with developing draft regulatory technical standards specifying the details of the level of substantially systemic clearing services to be maintained in the active accounts in EU CCPs.
In doing so, ESMA should consider the costs, risks and the burden such calibration entails for banks and corporates, the impact on their competitiveness, and the risk that those costs are passed on to other firms acting as clients in the market. In addition, suitable phase-in periods for the progressive implementation of the requirement to hold a minimum level of clearing activity in the accounts at EU CCPs, should be foreseen.
Where ESMA undertakes an assessment under Article 25(2c) of EMIR and concludes that certain services or activities of a Tier 2 CCP are of substantial systemic importance, or that services or activities that were previously identified no longer are, the Commission is empowered to adopt a delegated act to amend the list of derivative contracts subject to the requirement accordingly.
Is this a relocation policy?
No. This is an issue of financial stability. According to the ESMA report on UK CCPs (2021) the amount of derivatives cleared in two UK CCPs are of such substantial systemic importance that they could pose a risk to the financial stability of the EU, or to one of its Member States.
As it is designed to address the specific risks identified, the requirement does not imply that all clearing should be repatriated to the EU. It covers only a portion of the relevant activities and does not forbid clearing in other jurisdictions.
Why is the Commission changing certain provisions concerning equivalence?
The proposal entails two different aspects related to the equivalence framework under EMIR.
First, the Commission simplifies the framework for intragroup transactions. It provides more legal certainty to market participants and our international partners by deleting the condition of an equivalence decision to benefit from intragroup exemption. In order to benefit from the intragroup exemption, entities located in third countries should be in a country that is not identified as having deficiencies in terrorist financing and anti-money laundering regulations, or considered as a non-cooperative jurisdiction for tax purposes. The country should also not have been identified by the Commission based on legal, supervisory and enforcement arrangements with regard to risks, including legal and counterparty credit risks.
Second, the proposal introduces the possibility for the Commission to take a more proportionate approach when adopting an equivalence decision for a third country by waiving the requirement to have an effective equivalent system for recognising third-country CCPs. This will be possible only when it is deemed to be in the interests of the Union and particularly when the risks involved in clearing in that third country are low.
When will the new rules become applicable?
Once adopted, the proposals will both start to apply immediately.
Changes to the prudential rules for insurance and reinsurance companies will take the form of a Delegated Act.
Source – EU Commission
Remarks by EU Commissioner McGuinness at the press conference on new proposals to boost the EU’s Capital Markets Union
Brussels, 7 December 2022
Commissioner McGuinness:
Thank you very much, Valdis, and good afternoon everyone.
I’m going to start at when things go wrong – so insolvency, because Valdis has set out why we’re doing this and indeed some of the elements of this package.
And I think a very striking figure is that across our Member States, the procedure can take 7 months in some Member States, or up to 7 years in others.
So clearly there is a need to harmonise how insolvency happens and indeed the duration.
So all of the proposals we’ve made aim at allowing investors recover value, ensuring that value is not lost from the company in the lead-up to insolvency.
But equally importantly we’re recognising that for microenterprises that do not succeed, that they have difficulty accessing insolvency because of costs.
And that can stop them getting back into business because they can’t discharge their debt, and we’re addressing that in this proposal.
So we’re simplifying procedures for microenterprises by waiving the obligation to appoint an insolvency practitioner.
So all of the work on insolvency, we’ve worked with our colleague Commissioner Reynders hand in hand on this proposal, it will involve both Justice Ministries and Finance Ministries.
If I move them to listing then.
Clearly, when it comes to listing, for example, we get a lot of innovators starting companies in Europe, they then move to the US when it comes to getting access to finance.
And so this proposal to facilitate more listings on stock exchanges will allow for those innovators:
Number one, access capital;
Number two, if they want, if you like, to control the company, in other words not to lose their vision for the company, we are working and have a proposal around share voting rights which will assist that process.
And essentially what we’ve done here is we’ve gone through the procedure of the prospectus and made it more usable and user friendly, for those who want to get listed.
With the view to the CMU is all about making sure we don’t have to rely too much on bank finance which we do today, that we move towards capital markets.
On the third point, around the architecture of the financial system.
Valdis has well outlined what we’re doing here: we set out some time ago what we were doing in relation to equivalence for UK CCPs.
At that stage we announced that we would be making some proposals around, how do we address systemic issues, risks, vulnerabilities, and how do we make the European system more resilient.
So this is our proposal on clearing.
It’s very measured: it addresses the problems identified.
And we’re taking action to make sure that over time we will build up in the European Union a stronger architecture around CCPs.
We do have CCPs in the European Union – we estimate at the moment that participants, all of our businesses, would have 60% if I get the figure correctly – 60% of our entrepreneurs have – I’m looking towards Florian – have open accounts with CCPs – I’m getting the nod, so I got that right. The figure is 60%.
So we already have a lot of our work and groundwork in place, and we’re building on it with this proposal on clearing.
But equally important are the listing elements and indeed the insolvency piece.
Thank you.