Commission Implementing Decision (EU) 2021/85 of 27 January 2021 on the equivalence of the regulatory framework of the United States of America for central counterparties authorised and supervised by the US Securities and Exchange Commission

COMMISSION IMPLEMENTING DECISION (EU) 2021/85 of 27 January 2021 on the equivalence of the regulatory framework of the United States of America for central counterparties authorised and supervised by the Securities and Exchange Commission of the United States with the requirements of Regulation (EU) No 648/2012 of the European Parliament and of the Council (Text with EEA relevance)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (1), and in particular Article 25(6) thereof,

Whereas:

(1) The procedure for the recognition of central counterparties ('CCPs') established in third countries provided for in Article 25 of Regulation (EU) No 648/2012 aims to allow CCPs established and authorised in third countries whose regulatory rules are equivalent to those provided for in that Regulation to provide clearing services to clearing members or trading venues established in the Union. That recognition procedure and the equivalence decisions provided for therein therefore contribute to the achievement of the general objective of Regulation (EU) No 648/2012, namely to reduce systemic risk by promoting the use of sound and safe CCPs for the clearing of OTC derivative contracts, even when those CCPs are established and authorised in a third country.

(2) For the legal regime of a third country to be considered equivalent to the Union legal regime with regard to CCPs, the substantive outcome of the applicable legal and supervisory framework must be equivalent to that of the Union requirements in terms of the regulatory objectives achieved. The purpose of such an equivalence assessment is therefore to verify whether the legal and supervisory framework of the third country in question ensures that CCPs established and authorised in that country do not expose clearing members and trading venues established in the Union to a higher level of risk than they would be exposed to by CCPs authorised in the Union and that, consequently, they do not pose unacceptable levels of systemic risk in the Union.

(3) The assessment of whether the legal and supervisory framework of the United States of America ('the US') is equivalent to that of the Union should therefore be based not only on a comparative analysis of the legally binding requirements applicable to CCPs in the US, but also on an assessment of the outcome of those requirements and their adequacy to mitigate the risks to which clearing members and trading venues established in the Union may be exposed.

(4) In accordance with Article 25(6) of Regulation (EU) No 648/2012, three conditions must be met to determine that the legal and supervisory framework of a third country with regard to CCPs authorised therein is equivalent to that established in that Regulation.

(5) Under the first condition, CCPs authorised in a third country must comply with legally binding requirements that are equivalent to the requirements set out in Title IV of Regulation (EU) No 648/2012.

(6) The Securities and Exchange Commission (hereinafter 'the SEC') of the United States is the competent authority for the authorisation and supervision of CCPs in relation to securities and derivative contracts based on a single security, a loan or a narrow-based security index or group of securities ('securities-based derivatives'). Derivative contracts falling within the SEC's jurisdiction therefore constitute a subset of the derivative contracts to which the provisions on CCPs established in Regulation (EU) No 648/2012 apply. Other derivative contracts fall within the jurisdiction of the Commodity Futures Trading Commission (hereinafter 'the CFTC') of the United States, with regard to which the Commission has already adopted Commission Implementing Decision (EU) 2016/377 (2). The current assessment therefore concerns the equivalence of the legal and supervisory framework applicable in the United States to CCPs supervised by the SEC, and not the legal and supervisory framework of CCPs providing clearing services that fall under the CFTC's jurisdiction. Where a CCP is supervised by both the SEC and the CFTC, this Decision should only affect such a CCP to the extent that it provides clearing services that fall under the SEC's jurisdiction.

(7) The legally binding requirements applicable in the United States to CCPs supervised by the SEC are set out in the rules applicable to 'clearing agencies' contemplated in the Securities Exchange Act of 1934 (3) (hereinafter 'the Exchange Act'), the Dodd-Frank Wall Street Reform and Consumer Protection Act (4) (Dodd-Frank Act) and the regulations adopted by the SEC under those laws. In addition, the rules, policies and procedures of CCPs registered with the SEC are legally binding on the CCP. On 1 October 2020, the SEC published a staff report describing the applicable rules and their enforcement regarding CCPs supervised by the SEC (5).

(8) The SEC defines 'CCPs' as clearing agencies that stand between counterparties, acting as buyer to every seller and as seller to every buyer. The term 'clearing agency' is defined in Section 3(a)(23) of the Exchange Act of 1934 as any person who acts as an intermediary in making payments or deliveries, or both, in connection with securities transactions, or who provides facilities for comparison of data relating to the settlement terms of securities transactions, to reduce the number of settlements of securities transactions or for the allocation of responsibilities in the settlement of securities.

(9) The SEC may designate certain clearing agencies as clearing agencies with a more complex profile. Any CCP that clears security-based swaps is always considered a clearing agency with a more complex risk profile. In addition, the Financial Stability Oversight Council may designate a CCP as a systemically important entity under the Dodd-Frank Act. CCPs with a more complex risk profile or of systemic importance are considered 'covered clearing agencies'. The enhanced framework established in Section 17Ad-22(d) and (e) of the SEC rule applies to those CCPs. This Decision refers only to the equivalence of the legally binding requirements of the United States applicable to CCPs that must comply with those enhanced rules.

(10) In accordance with the Exchange Act, the Dodd-Frank Act and the SEC regulations, a CCP that clears securities or securities-based derivatives, transactions referred to in that Act as security-based swaps, is required to register with the SEC or apply for an exemption from registration.

(11) The Exchange Act does not prescribe specific tools or provisions on how to comply with the requirements established therein. While a CCP may take into account its unique characteristics and circumstances when establishing its rules and procedures, such as its ownership and governance structures, its effects on direct and indirect participants, its membership base, the markets supplied and the risks inherent in the cleared products, its internal rules and procedures must prescribe in detail how the requirements established in the Exchange Act will be met. Once registered with the SEC, the rules, policies and procedures approved by the SEC become legally binding on the CCP.

(12) Once registered with the SEC, the CCP becomes a 'self-regulatory organization' under Section 3(a)(26) of the Exchange Act and, as such, must submit any modification of its rules to the SEC for approval. The SEC will verify that the proposed rule modification is consistent with the rules established in the Exchange Act and in the SEC regulations.

(13) The legally binding requirements imposed in the United States with regard to CCPs classified as covered clearing agencies are structured in two levels. The first level consists of the primary rules and requirements established in Sections 3(a)(23) and 17A of the Exchange Act, in Titles VII and VIII of the Dodd-Frank Act and in the SEC regulations, in particular Section 17Ad-22 (hereinafter 'primary rules'). The second level consists of the internal rules and procedures of those CCPs, which are legally binding on the CCPs from the moment of their registration with the SEC and therefore form part of the rules whose compliance is supervised by the SEC. In assessing whether CCPs classified as covered clearing agencies comply with legally binding requirements that are equivalent to the requirements set out in Title IV of Regulation (EU) No 648/2012, the Commission must take into account the legally binding requirements established in the internal rules and procedures of those CCPs, together with the requirements established in the Exchange Act and the Dodd-Frank Act and in the SEC regulations.

(14) To be registered with the SEC, a CCP classified as a covered clearing agency, and its internal rules, must comply with the high-level standards established in the primary rules. These requirements, complemented by the CCP's internal rules and procedures, generate substantive outcomes equivalent for the purposes of the standards established in Title IV of Regulation (EU) No 648/2012. In particular, CCPs classified as covered clearing agencies must comply with requirements relating to their organisational structure and rules to ensure fast and accurate clearing and settlement, as well as the safeguarding of securities and funds under their control, and to ensure the protection of investors and the public interest, including requirements relating to senior management, risk management and internal control mechanisms, record keeping, qualifying holdings, information transmitted to the competent authority, conflicts of interest, business continuity, outsourcing, business management and segregation, as well as liquidity risk, margin, investment policy and settlement risk. Other requirements relate to participation conditions and fees, as well as rules for sanctioning breaches of CCP rules by participants.

(15) However, the legally binding requirements applicable to CCPs classified as covered clearing agencies differ in some respects from the rules of Title IV of Regulation (EU) No 648/2012.

(16) First, the primary rules on liquidity risk do not require CCPs considered covered clearing agencies to maintain eligible liquidity resources to meet the 'Cover 2 principle' established in Article 44 of Regulation (EU) No 648/2012, i.e. liquid resources to cover at least the default of the two clearing members with respect to which they have the largest exposures. In the United States, however, CCPs considered covered clearing agencies are required to establish procedures to cover any liquidity shortfall discovered, ensuring that committed resources are available when losses exceed the default of the clearing member to which they are most exposed. In addition, the primary rules require CCPs considered covered clearing agencies to apply the 'Cover 2 principle' when clearing securities-based derivatives. Although this is a different approach from the 'Cover 2 principle' established in Articles 42, 43 and 44 of Regulation (EU) No 648/2012, the primary rules, together with the internal rules and procedures of the CCPs, generate substantive outcomes equivalent for the purposes of the 'Cover 2 principle' established in Union rules.

(17) Second, the primary rules do not provide for a minimum settlement period. However, all CCPs considered covered clearing agencies apply minimum settlement periods of two to five days in accordance with their internal rules and procedures. Union legislation establishes a minimum settlement period of two days for OTC derivatives and five days for OTC derivatives, with margin collection usually on a net basis. Consequently, the internal rules and procedures of the CCPs generate substantive outcomes equivalent for the purposes of Union rules on settlement periods.

(18) Third, Union law requires the application of at least one of three anti-procyclicality measures to ensure that initial margins are not reduced too much during periods of economic stability nor increase suddenly during times of stress. Those measures allow margins to be stable and prudent. The primary rules do not contain such a specific requirement. However, CCPs considered covered clearing agencies have internal rules and procedures with anti-procyclical effects. Consequently, the internal rules and procedures of the CCPs generate substantive outcomes equivalent for the purposes of Union rules on anti-procyclicality.

(19) Finally, with regard to the segregation and portability of customer positions and collateral of clearing members, Section 17Ad-22(e)(14) requires that the rules, policies and procedures of CCPs classified as covered clearing agencies allow for the segregation and portability of a clearing member's customer positions and the corresponding collateral, and that they effectively protect those positions and collateral against the default or insolvency of that clearing member when those CCPs clear securities-based derivatives or have a more complex risk profile and therefore follow an approach similar to the rules contained in Title IV of Regulation (EU) No 648/2012. However, in the case of cash securities and listed options, the primary rules are based on the rules applicable to clearing members. In those markets, the rules applicable to clearing members already guarantee an adequate level of segregation and portability and therefore adequately protect customer positions and collateral. Although they follow a different approach with regard to segregation and portability at the level of clearing members, and not of the CCP, with regard to those markets, both approaches result in similar outcomes with regard to the protection of customers.

(20) The legal and supervisory framework of the US applicable to CCPs classified as covered clearing agencies should therefore be considered equivalent, provided that the internal rules and procedures of the CCPs seeking recognition comply with certain requirements in terms of risk management. In particular, CCPs must apply a two-day settlement period to OTC derivative contracts and a five-day settlement period to OTC derivative contracts, both on a net basis. In addition, the CCP must apply measures intended to limit procyclicality that are equivalent to any of the three measures established in Regulation (EU) No 648/2012 when achieving stable and prudent margins.

(21) The Commission concludes that the legal and supervisory framework of the SEC applicable to CCPs classified as covered clearing agencies, which comprises the requirements established in the Exchange Act, the Dodd-Frank Act and the SEC regulations, as well as the internal rules and procedures of CCPs registered and classified as covered clearing agencies, should be considered a legally binding requirement that is equivalent to the requirements established in Title IV of Regulation (EU) No 648/2012, to the extent that they comply with the standards established in this Decision with regard to risk management.

(22) Only CCPs that comply with the rules applicable to covered clearing agencies and the legally binding requirements that comply with the risk management standards established in this Decision may be recognised by the European Securities and Markets Authority (ESMA). ESMA must verify, in accordance with Article 25(2)(b) of Regulation (EU) No 648/2012, that those risk management standards form part of the internal rules and procedures of any CCP supervised by the SEC and seeking recognition in the Union. In particular, ESMA must verify that the CCP applies a two-day settlement period to OTC derivative contracts and a five-day settlement period to OTC derivative contracts, both on a net basis, and that the CCP applies measures intended to limit procyclicality that are equivalent to any of the three measures established in Regulation (EU) No 648/2012 when achieving stable and conservative margins.

(23) In accordance with Article 25(6)(b) of Regulation (EU) No 648/2012, the legal and supervisory framework with regard to CCPs established in a third country must also provide that those CCPs are subject on an ongoing basis in that country to effective supervision and compliance monitoring.

(24) The SEC carries out ongoing monitoring of CCPs under its supervision. In addition to its power to review and approve rule modifications submitted by a registered CCP, the SEC has broad powers to request copies of the books and records of CCPs and to examine and conduct on-site inspections in order to assess existing and emerging risks and supervise the CCP's compliance with the rules applicable to it, as well as the control exercised by the CCP over the compliance of its participants with their internal rules and procedures. The SEC has the power to request modifications to rules and procedures and may bring civil actions for injunction or otherwise, or administrative proceedings in case of breach of applicable rules. The SEC's examination may result in the revocation of registration if deficiencies are not remedied. These powers also apply to CCPs classified as covered clearing agencies.

(25) The Commission therefore concludes that the legal and supervisory framework with regard to CCPs, including those classified as covered clearing agencies, provides for effective supervision and compliance monitoring on an ongoing basis.

(26) In accordance with Article 25(6)(c) of Regulation (EU) No 648/2012, the legal and supervisory framework of a third country must include an effective equivalent system for the recognition of CCPs authorised under third-country legal regimes ('third-country CCPs').

(27) Non-US CCPs may apply to the SEC for registration as a 'clearing agency'. To date, the SEC has required such registration, or an exemption from registration, for clearing services in relation to US securities supplied to US citizens or in relation to security-based swaps.

(28) Non-US CCPs registered with the SEC must comply with the relevant US requirements, including the SEC regulations applicable to registered clearing agencies classified as covered clearing agencies. However, the Exchange Act grants the SEC broad exemption power. Under Section 17A(b)(1) of the Exchange Act, the SEC may grant exemptions from regulatory requirements if they are consistent with the public interest, investor protection and the objectives of Section 17A of the Exchange Act, including the prompt and accurate clearing and settlement of securities transactions and the safeguarding of securities and funds. Under Section 36 of the Exchange Act, the SEC may exempt, conditionally or unconditionally, any person, security or transaction, or any category or categories of persons, securities or transactions, from the provisions of the Exchange Act or the rules or regulations thereunder, to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors. In addition, in accordance with Section 17A(k) of the Exchange Act, the SEC may grant an exemption, conditional or unconditional, from registration as a clearing agency for the clearing of security-based swaps if the SEC determines that the clearing agency is subject to comparable and comprehensive supervision and regulation by the competent public authorities of the clearing agency's home country.

(29) The SEC has issued a statement and guidance on the policy (6) applied to CCPs authorised in the Union. The statement provides a general overview of the legal framework applicable to CCPs registered with the SEC and explains the application process for registration and exemptions. It also provides examples of how the SEC has applied its exemption powers to avoid imposing unnecessary, duplicative or inconsistent requirements in relation to the requirements applicable to a CCP in the home country, when the framework of that jurisdiction is generally

(1) OJ L 201, 27.7.2012, p. 1.
(2) Commission Implementing Decision (EU) 2016/377 of 15 March 2016 on the equivalence of the regulatory framework of the United States of America for central counterparties authorised and supervised by the Commodity Futures Trading Commission with the requirements of Regulation (EU) No 648/2012 of the European Parliament and of the Council (OJ L 70, 16.3.2016, p. 32).
(3) Sections 3(a)(23) and 17A.
(4) Titles VII and VIII.
(5) Staff Report on the Regulation of Clearing Agencies, by the Office of Inspections and Examinations of the Division of Trading and Markets, https://www.sec.gov/files/regulation-clearing-agencies-100120.pdf.
(6) Statement and Guidance on the Policy Applied to CCPs Authorised in the Union.

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