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EMIR related provisions

On the 12th July 2013 the Financial Conduct Authority issued a consultation paper setting out its plans to review the rules relating to the manner in which investment firms such as brokers handle assets which their clients have entrusted to them.. This is an important consultation . Responses are invited by 11th October 2013 and I intend to submit a full response. However, there is one question within the paper for which responses are required by 12th August 2012. This question relates to specific provisions required by EMIR to facilitate the ‘porting’ of open  trades in the event of a default by a regulated broker.

Traditionally, if you were dealing in derivatives through a broker who went bust, the clearing house or central counterparty would declare the broker to be in default and would then close out all its open positions in the market. This is likely to be both inconvenient for the client and potentially disruptive to the market if there is a significant number of trades to be closed.

EMIR provides that in the event of a default by one of its members, a central counterparty should endeavour to transfer positions belonging to the members clients to another member rather than that they should be closed out. The FSA’s Consultation Paper 12/22 issued in September last year proposed rule changes to facilitate this including a provision for the clearing house to make the transfer and provisions for broking firms to create separate sub pools of client money which could be transferred with the ported positions. It also provided for the use of sub-pools of client money in other circumstances if this might benefit clients.

Based on feedback to that consultation paper, the FCA now proposes in chapter three of the new consultation, to permit only those firms that are clearing member firms that offer net omnibus client transaction accounts at central counterparties to operate multiple client money pools, and then only in relation to those net omnibus accounts.

Meanwhile, in section 8 of the consultation paper, in response to the publication of the EMIR regulatory technical standards, it proposes to allow brokers who clear the business of other brokers to make arrangements to port the positions of the sub-broker’s clients in the same way as the central counterparty would port the positions of clients of its members.

As far as it goes, that is fine. However, the prohibition on the use of either gross margined omnibus accounts or multiple pools by anyone other than a clearing member of the central counterparty means that porting will not be a viable option for such firms.

I believe, therefore, that it will be necessary for the FCA to again reconsider the circumstances in which it will permit the use of multiple pools or gross margining. And to that end, I have today sent this response to question 48 in the FCA’s consultation paper 13-05.

FCA CP 13/5: Review of the Client Assets Regime