FIA and ISDA Urge ESMA Caution on Margin Transparency Requirement Rules

In response to a consultation by the European Securities and Markets Authority (ESMA) on margin transparency requirements, industry body FIA has urged the regulator to avoid overly prescriptive requirements for clearing firms, especially those that merely pass through clearinghouses’ requirements to their clients. This was reinforced by ISDA that provided data to ESMA highlighting the low incidence of clients paying additional fees beyond those of the clearinghouse.

ESMA’s consultation covers transparency requirements for both central counterparties (CCPs) and Clearing Service Providers (clearing members and clients providing clearing services – CSPs) in relation to margin models and simulations. Stressing that FIA “strongly supports” the overarching policy objectives that are aimed at ensuring all parties are better prepared for margin calls and associated liquidity needs, especially during periods of stress, Jacqueline Mesa, FIA’s COO and SVP of global policy at FIA, says, “However, we urge ESMA to ensure that these RTS [regulatory technical standards] remain firmly aligned with the Level 1 mandate, both in scope and proportionality. As set out in Article 38(7) and (8) of EMIR, the primary obligation for margin transparency lies with CCPs, with CSP obligations focused on facilitating the onward transmission of relevant CCP information and providing clients with disclosures when the CSP adds additional margin.”

A recent FIA survey of clearing members found that 86.5% of clients are charged CCP margin only, 10.5% are charged CCP margin with CSP add-on (most often simple multipliers), and only 3% are subject to CSP proprietary margin models. This means, the association argues, that in practice, most client exposures are driven by CCP margin, with CSP transparency needs limited to onward disclosure and proportionate add-on information.  

This aspect was also a core theme of ISDA’s response, the association noting that in a sample of seven ISDA members that provide clearing services in the EU, only 7% of clients on average pay a margin multiplier or any form of additional margin requirements higher than CCP margin requirements. “Access to CCP simulators should therefore suffice for most clients,” ISDA states. “Additionally, clearing service providers could share worked hypothetical examples of how these factors could apply in practice by providing examples of ‘If X occurs, then Y multiplier may be applied’. When a client is charged a client-specific add-on, then clearing service providers can provide further information on the multiplier upon request or provide historical illustrative examples.”

ISDA proposes a a more direct approach whereby CCPs make model documentation and simulators available directly to clients. Equally, FIA says it welcomes the focus in ESMA’s draft RTS on strengthening CCP disclosures, stating, “Given the clear market evidence that CCP margin is the primary driver of client exposures, CCP disclosures and simulations should be prioritised.” 

FIA is also urging ESMA to more carefully consider whether the proposed requirements on CSPs are proportionate, risk-based and supported by a clear rationale. This includes gathering more information on the actual needs and expectations of clients before introducing detailed and prescriptive measures. 
As an example, FIA says the proposals state that CSPs should provide “two scenarios related to the individual risk of the client”. This goes beyond CCP simulation requirements and is not an efficient way to provide transparency to end-users, especially if a CSP has hundreds, if not thousands, of clients with individual risk, FIA argues. 

“Overly burdensome or non-risk-aligned requirements on EU-based CSPs, particularly where similar expectations are not imposed globally or not in line with international standards, may inadvertently weaken the relative attractiveness and scalability of clearing services in Europe,” says Mesa. 

FIA instead recommends that ESMA reinforces the transparency requirements for CCPs in line with EMIR Article 38(7), and ensures that CSP disclosures are proportionate, risk-based and do not go beyond the clear limits of Level 1. It also says ESMA should clarify and streamline simulation expectations in ways that add value for clients while remaining operationally feasible for CSPs. 

Separately, while Article 10 of the draft RTS is not subject to consultation, FIA has urged ESMA and the European Commission to ensure that the final RTS includes “a proportionate and realistic compliance timeline that reflects the operational, legal and technological complexity of the proposed requirements, especially for CSPs”.  

It adds that many CSP disclosure and simulation obligations under the draft RTS are dependent on CCPs first implementing their own transparency frameworks, therefore a staggered implementation approach, where CCPs are subject to an earlier compliance deadline, and CSPs follow only after CCP outputs are available and accessible, is preferred.  

“Without such staging, CSPs would be unable to comply in practice, leading to unintended regulatory breaches and operational risk,” FIA concludes.