The active account requirement (AAR) in EMIR 3.0 is a highly debated issue that has captured headlines – including ours – for the past year. Following implementation of the regulation later this year, the spotlight will be on the European Securities and Markets Authority (ESMA), which has been tasked with defining the active account threshold and evaluating its effectiveness. In an opinion piece on Risk.net, journalist Rebekah Tunstead comments that the authority will have its work cut out for it, not least because there remains no metric for measuring progress.
Likely to come under the most scrutiny is the effect of the AAR on European trade cleared through tier-two CCPs, defined by ESMA as CCPs located outside the EU that are “systemically important”. In particular, due to the post-Brexit climate, eyes will be on the London branch of LCH and ICE Clear Europe.
A risk of backfire
Regulators claim that setting an AAR for tier-two CCPs will mitigate systemic risks and funnel trade back into the EU. Many in the industry disagree. In a paper examining the costs of the AAR, the International Swaps and Derivatives Association (ISDA) says that it “does not believe that clearing at UK tier-two CCPs poses unmitigated systemic risk”. It warns that “there is a trade-off between mandating clearing in Europe and preserving the competitiveness of EU clearing participants”.
Buy-side experts have said that the AAR could increase systemic risks instead of lower them, while sell-side members have expressed worries about rising costs for their clients and their house businesses. The debate has even crossed the Atlantic, with Bloomberg columnist Marcus Ashworth writing that “while trading has fled, clearing has very much stayed put in London.”
No clear path
ESMA has six months following the implementation of EMIR 3.0 to calibrate AAR thresholds and 12 months after that to evaluate the success of the AAR in reducing European firms’ exposure to tier-two CCPs – despite not having established what the marker of success should be.
“The trilogue text didn’t define what effectiveness means, so it will be up to Esma to create some sort of metric to evaluate the progress of the regulation,” writes Rebekah Tunstead.