As a CCP, LCH.Clearnet SA is required to be licensed as a credit institution under French law. However, LCH.Clearnet SA does not hold eligible liabilities; it only holds Core Equity Tier 1 (“CET1”) capital at a level compliant with both the EU Capital Requirements Regulation (CRR) and EMIR.
It is important to note that EMIR only recognises liquid own funds as regulatory capital and excludes any other instruments such as subordinated debt. Any additional liabilities held by a CCP would only cover banking capital requirements and not those imposed on it in its function as a CCP.
Moreover, the risks associated with the clearing activities of a CCP are covered by the resources the CCP holds as part of its default waterfall . The capital of the CCP (excluding its contribution to the default waterfall, the so-called ‘skin in the game’) is designed to mitigate the losses being triggered by non-clearing activities. If a CCP were obliged to comply with the proposed criteria for determining MREL, its CET1 capital would be drastically increased but without any changes to the risk profile of the CCP.
Banking capital requirements are set and assessed on a risk-by-risk basis (credit, market, business risks, etc). The proposed approach to MREL, which envisages having the full amount of capital requirements as a loss absorption amount, would imply that losses relating to all these individual risks crystallise more or less at the same time. In our view this does not appear to be plausible and ignores the idiosyncratic nature of the events which these additional capital requirements attempt to cover.
In addition, LCH.Clearnet emphasises that the recapitalisation amount proposal does not seem to be compatible with the wind down capital requirement required by EMIR. Under EMIR, a CCP must hold sufficient capital at all times to cover in aggregate (i) the winding down or restructuring of its activities, (ii) its operational and legal risks, (iii) its credit, counterparty and market risks and (iv) its business risks. The winding down or restructuring capital requirement is based on the annual gross operational expenses. It should be clarified that this capital requirement is a relevant amount available specifically to cover the costs necessary to keep a CCP functioning for a certain period while winding down and should therefore be considered as the relevant amount under Article 3 of the draft RTS for CCPs.
We believe that for CCPs EMIR provides an appropriate basis to ensure sufficient resources are available to withstand losses under very extreme conditions and guarantees that the CCP can wind down its activity in an orderly manner. The proposed requirement under MREL would be a disproportionate requirement on CCPs such as LCH.Clearnet SA that already comply with the equivalent EMIR requirements and related EBA RTS for CCPs, specifically designed to contain the systemic impact of a CCP’s failure. In addition, CCPs with a banking license would be unfairly discriminated against CCPs without such license, thereby creating a competitive distortion in the market. We therefore suggest adding the below new recital in the proposed RTS:
Recital 6A (new)
Resolution authorities should assess the availability of non-capital loss absorbing buffers, such as default waterfalls, for central counterparties required under Regulation (EU) No 648/2012 instead of holding own funds as a loss absorption amount for losses relating to clearing activities.
LCH.Clearnet is of the view that the resolution authority should be able to consider the specific case of CCPs that are supervised both as CCPs and as credit institutions, and determine that the capital requirements applicable to a CCP should be taken into account when considering MREL. More precisely, not only should EMIR capital requirements be taken into account, but also MREL under BRRD should not lead to inconsistent results with the CCP recovery and resolution legislation that is expected to be published shortly.
As noted above, LCH.Clearnet does not believe that a credit institution’s capital requirement is a relevant benchmark for determining the loss absorbency capacity of a CCP. For CCPs, default fund requirements are calculated to withstand the losses of the largest two clearing members in extreme but plausible market conditions, (Article 42(3) of EMIR).
Under Article 2 of Regulation (EU) No 152/2013, CCPs are required to hold a sufficient amount in reserve to ensure that operational expenses for a period of at least 6 months (or however long its competent authority believes is necessary) to effect an organised winding-down of its clearing service. We believe this is the appropriate approach for CCPs and propose the following amendment to Article 3(6):
(6) The capital requirements referred to in paragraph 5 are in particular the following:
e. own funds requirements applicable to CCPs pursuant to Article 2 of Regulation (EU) No 152/2013.
We do not believe that the peer group approach is appropriate for CCPs with a banking license. As highlighted above, the activities of a CCP are very different to those of a credit institution.