Meltdown for CCPs Averted Until December 2014
How would clearing members react to losing capital relief on cleared trades?
How would clearing members react to losing capital relief on cleared trades? Badly I suspect, and that's what might have happened on June the 15th without a move by the European Commission to extend the date on which current capital rules apply. In the words of the EC:
In order to avoid disruption to international financial markets and to prevent penalising institutions by subjecting them to higher own funds requirements during the processes of authorisation and recognition of an existing central counterparty (CCP) as a qualifying central counterparty (QCCP), Article 497(1) and (2) of Regulation (EC) No 575/2013 established a transitional period during which all CCPs with which institutions established in the Union clear transactions will be considered QCCPs.
Meaning that without authorisation from ESMA, members of CCPs would have lost their capital benefit of clearing on June 15th. As regular readers know only six European CCPs have achieved authorisation under EMIR, listed in this article: http://www.theotcspace.com/2014/05/23/european-ccp-authorisation-may-23rd.
The EC has extended this deadline by 6 months to December 15th, by which time all CCPs ought to be authorised and therefore still benefit from capital relief, albeit at a different rate from now. A useful summary of CRD IV and the capital calculations for cleared business from A&O here.
The source of this nugget is over on the EC website here: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2014.165.01.0031.01.ENG