Deciphering the Regulatory Complexities of Central Counterparties (CCPs) in the EU

Josef Bergt
2023

Introduction

In the intricate web of financial markets, Central Counterparties (CCPs) have emerged as pivotal entities, serving as intermediaries between buyers and sellers in the trading of financial instruments. The role and regulatory framework governing CCPs have been codified in various legislative texts, most notably in the European Union's Regulation No. 648/2012, colloquially known as the European Market Infrastructure Regulation (EMIR). This article aims to outline the operational and regulatory aspects of CCPs. The objective is to elucidate the conditions under which an entity qualifies as a CCP, the markets it can operate in, the types of contracts it can handle, and the licensing requirements it must meet.

Legal Definition of a Central Counterparty

A CCP is defined in Article 2(1) of EMIR. Article 2(1) of EMIR stipulates that for the purposes of this regulation, a "CCP" is a legal entity that interposes itself between the counterparties to contracts with regard to financial instruments traded on one or more markets, thereby acting as a buyer to every seller and as a seller to every buyer. This definition is further clarified by the acronym CCP, which stands for Central Counterparty.

Criteria for Qualification as a CCP

An entity qualifies as a CCP if it satisfies the following conditions:

• It must be a legal entity.
• It must act as an intermediary between counterparties in contracts traded on one or more markets.
• It must act as a buyer for every seller and as a seller for every buyer.

Markets and Traded Contracts

Markets

Markets in the context of Article 2(1) of EMIR include financial markets such as stock exchanges, multilateral trading systems, and over-the-counter (OTC) financial markets.

Traded Contracts

The contracts in question must pertain to financial instruments as defined in MiFID II. These could range from purchase agreements to other comparable forms of financial instrument transfers, such as securities lending and repurchase agreements.

Licensing Requirements

The obligation to obtain a license for operating as a CCP is derived from Article 14(1) of EMIR. According to Article 14(1) of EMIR, a legal entity established in the European Union that wishes to provide clearing services as a CCP must apply for authorization from the competent authority of the Member State in which it is established, following the procedure laid down in Article 17 of EMIR.

Conclusion and Key Findings

This article has endeavored to provide a brief overview of the operational and regulatory aspects governing Central Counterparties (CCPs) within the European Union based on the European Market Infrastructure Regulation (EMIR).

Source: BaFin Factsheet Central Counterparty

Executive Summary:

• A CCP must be a legal entity that acts as an intermediary between counterparties in contracts traded on one or more financial markets.
• Markets include stock exchanges, multilateral trading systems, and OTC financial markets.
• Contracts must pertain to financial instruments as defined in MiFID II.
• Licensing requirements are derived from Article 14(1) of EMIR.