Shocking the System
On Feb. 1 the European Securities and Markets Authority published the framework for its 2017 stress testing exercise for central counterparties. This year's exercise, the second conducted by ESMA, will cover 17 CCPs in the European Union and all products currently cleared by these CCPs. ESMA will collect the data for the stress test from CCPs in March, finalize the data analysis by the third quarter and publish results in the fourth quarter.
The purpose of the exercise is to assess the resilience of clearinghouses to "adverse market developments" by analyzing the impact of various scenarios, ESMA said. This year's exercise will include liquidity risk alongside credit risk in the scenarios. The results of the exercise will provide supervisors, CCPs and other market participants with useful information on the resilience of the clearing system to different market shocks. The exercise will also help identify any potential shortcomings in the CCPs’ resilience, and if required ESMA will issue recommendations for further action.
The process by which the U.K. will leave the European Union, known as Article 50, is on course to be triggered by the end of March, following a vote in favor of the Article 50 Bill by the British members of Parliament on Feb. 8, endorsed by the House of Lords later in the month after thorough debate. The passage of the bill through the House of Commons means that Prime Minister Theresa May is still on schedule to trigger Article 50 by the end of March.
Debate continues about the impact of Brexit on Europe’s financial markets and what measures the U.K. will take to ensure it maintains its position as a key financial center. European Commission Vice President Valdis Dombrovskis said in a speech that the City of London will continue to be a “substantial financial center” post-Brexit, adding that “equivalence is certainly one of the options we are looking at… another is, of course, for industry to establish a substantial enough presence in the EU to maintain EU passporting [rights]”.
With regard to euro-denominated clearing in the U.K., he cited a number of factors to consider. “One is financial stability. There are questions related to the enforceability of swap lines between the [European Central Bank] and the Bank of England if the U.K. is to move out of the jurisdiction of the European Court of Justice.”
Meanwhile, the European Parliament’s lead Brexit negotiator has stated that it would not be possible to negotiate an EU-U.K. trade agreement in parallel with a withdrawal agreement and that negotiations over any transitional arrangements would start after an agreement is reached on the sum of the U.K.’s outstanding commitments. A leaked draft of a European Parliament report on the impact of Brexit states that Article 50 does not allow for transitional arrangements to be included in the withdrawal agreement.
FIA put forward the industry’s concern in its response to a Parliament’s Treasury Select Committee consultation regarding transitional arrangements in relation to Brexit. FIA’s letter notes that “significant market disruption, financial instability and regulatory uncertainty may result from a failure by the U.K. and the EU to deliver a smooth transition through the Brexit process," and urged policymakers to agree on transition terms in the first few weeks of negotiation following the trigger of Article 50.
FIA detailed the following key priorities:
■ “Equivalence” for the U.K. and its market infrastructure. FIA urged policymakers to complete the process prior to the end of the two-year Article 50 process, failing which employ a grandfathering regime.
■ Transitional arrangements. In order to avoid a “cliff-edge” and to give the global industry sufficient time to transition into the new regulatory paradigm, transition arrangements are necessary.
■ Confirmation within the first few weeks of negotiation that transitional arrangements will be part of the deal. The end of 2017 will be too late, as firms will already be executing their contingency plans, based on worst-case scenario planning.
EMIR Under Review
Steven Maijoor, the chairman of the European Securities and Markets Authority, called for "an ambitious EMIR review" in a Jan. 23 speech in Amsterdam. One area of focus should be third-country arrangements, he said, adding that ESMA has two main concerns regarding the equivalence mechanism under EMIR, the European regulation that governs exchanges, clearinghouses and other market infrastructure.
The EU is “an island” of equivalence and third-country reliance in a world that has mostly opted for registering individually those infrastructures and market participants that want to do cross-border business, Maijoor said. He added that there are questions over whether the risks
of the third-country infrastructures’ activities in the EU are adequately assessed and addressed by the home regulator in the third-country.
The Securities and Futures Commission of Hong Kong signed a memorandum of understanding on Jan. 18 with the Securities and Exchange Commission of the U.S. providing for consultation, cooperation and the exchange of information regarding the supervision and oversight of regulated entities that operate on a cross-border basis in the two jurisdictions. The MOU covers exchanges and other trading venues, market intermediaries, clearing- houses, investment funds and credit rating agencies.
On Jan. 19, the Securities and Exchange Board of India published a consultation paper that clarifies a key issue blocking the introduction of exchange-traded commodity options. The government permitted exchanges to offer these products last year, but did not define what type of option could be listed. The proposed amendments would allow the trading of options on futures, which would settle into the underlying commodity futures contracts on expiry, rather than cash-settled options. Although this differs from the practice in India's equity derivatives market, SEBI explained that options on futures might be more suitable for agricultural commodities in India. SEBI also noted that the leading commodity derivatives exchanges in many other countries list options on commodity futures.
After months of preparations and regulatory negotiations, BSE completed its initial public offering on Feb. 3. The exchange, formerly known as the Bombay Stock Exchange, sold 15.42 million shares, which represents approximately 30% of its total equity, and raised 12.43 billion rupees ($182 million) in capital.
The selling shareholders included Singapore Exchange, which sold all of its 5.7% stake in the company, as well as George Soros’s Quantum Fund and Canadian investor Thomas Caldwell. Deutsche Boerse opted to retain its stake of just under 5%, however. The German exchange operator has a strategic partnership with BSE through its subsidiary Eurex that covers trading technology and product cross-listings.
National Stock Exchange of India, the country's largest market for both stocks and derivatives, is also close to going public. The exchange filed its prospectus with SEBI in December and plans to offer 22.5% of its shares. Several international banks and investor groups are looking to sell their stakes in NSE through the IPO. They include Citigroup Strategic Investments, Goldman Sachs, Temasek Holdings and Tiger Global Management.
In related news, SEBI amended its rules in January to allow greater foreign investment in Indian exchanges and clearinghouses. The new rules allow persons incorporated outside India to acquire or hold up to 15% of the equity share capital of an Indian exchange. Previously, foreign entities could hold only up to 5% in an exchange.