The European Commission has adopted an implementing act that will extend the transitional period for capital requirements for EU banking groups’ exposures to central counterparties under the Capital Requirements Regulation. The CRR introduced a capital requirement for the exposures of EU banks and their subsidiaries to a CCP.

“The decision will give the market the legal certainty it needs for the next six months,” said Jonathan Hill, EU Commissioner responsible for Financial Stability, Financial Services and Capital Markets Union. “Meanwhile we are continuing to work hard on solving the underlying issues.”

The current transitional period expires on June 15, 2015.

A further extension of the transitional period should enable institutions established in the Union (or their subsidiaries established outside the Union) to avoid significant increase in the own funds requirements due to the lack of recognized CCPs established in each relevant third country which provide, in a viable and accessible way, the specific type of clearing services that Union institutions require. While such an increase may only be temporary, it could potentially lead to the withdrawal of those institutions as direct participants in those CCPs and hence cause disruption in the markets in which those CCPs operate.

CCPs are commercial entities that are interposed between the two counterparties to a transaction, becoming the buyer to every seller and the seller to every buyer. A CCP’s main purpose is to manage the risk that could arise if one counterparty is not able to make the required payments when they are due – i.e. defaults on the deal. The size of the requirement depends on whether a CCP is labelled as ‘qualifying’ or not. Capital charges for exposures to non-qualifying CCPs are higher.

In order for a CCP to be considered a qualifying CCP, it has to be either authorized (for those established in the EU) or recognized (for those established outside the EU) in accordance with the rules laid down in the European Market Infrastructure Regulation.

Since the process of authorization and recognition takes time, the CRR provides a transitional period during which these higher requirements will not be applied, to ensure a level playing field for EU CCPs. As the authorization and recognition processes for existing CCPs serving EU markets will not be fully completed by June 15, the European Commission adopted an implementing act that will now extend the transitional phase to Dec. 15, 2015. This extension period will smooth implementation for CCPs that are still in the process of reauthorization under our new rules.

The extension is also applicable to third country CCPs seeking recognition in the EU. Only CCPs established in a third country which the Commission has determined to be equivalent as regards its CCP requirements can be recognized in the EU. The Commission recently adopted decisions of equivalence for Hong Kong, Japan, Singapore and Australia, which paves the way for CCPs from those jurisdictions to now obtain qualifying status. However, other jurisdictions do not have equivalent status yet.