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Article 4(3a) of [EMIR]]
3a. Without being obliged to contract, clearing members and clients which provide clearing services, whether directly or indirectly, shall provide those services under fair, reasonable, non-discriminatory and transparent commercial terms. Such clearing members and clients shall take all reasonable measures to identify, prevent, manage and monitor conflicts of interest, in particular between the trading unit and the clearing unit, that may adversely affect the fair, reasonable, non-discriminatory and transparent provision of clearing services. Such measures shall also be taken where trading and clearing services are provided by different legal entities belonging to the same group.
Clearing members and clients shall be permitted to control the risks related to the clearing services offered.
The Commission is empowered to adopt delegated acts in accordance with Article 82 to supplement this Regulation by specifying the conditions under which the commercial terms referred to in the first subparagraph of this paragraph are to be considered to be fair, reasonable, non-discriminatory and transparent, based on the following:
- (a) fairness and transparency requirements with respect to fees, prices, discount policies and other general contractual terms and conditions regarding the price list, without prejudice to the confidentiality of contractual arrangements with individual counterparties;
- (b) factors that constitute reasonable commercial terms to ensure unbiased and rational contractual arrangements;
- (c) requirements that facilitate clearing services on a fair and non-discriminatory basis, having regard to related costs and risks, so that any differences in prices charged are proportionate to costs, risks and benefits; and
- (d) risk control criteria for the clearing member or client related to the clearing services offered.
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Under the EMIR Refit, clearing members and service providers (in ESMA’s terms, “CSP”s), must “offer and provide clearing services under commercial terms considered fair, reasonable, non-discriminatory and transparent (principles known as FRANDT)”.Under the new FRANDT regime the Commission can specify the conditions under which the commercial terms are to be considered to be fair, reasonable, non-discriminatory and transparent and did so in June 2020.[1] The rules come into effect on 18 June 2021 and are designed to improve access to clearing.
Quoth ESMA:
- It is clear that the FRANDT rules need to strike the right balance between on one hand the interest of improving clearing client’s access to clearing services and ensuring such services are provided on FRANDT compliant terms and on the other hand ensuring the CSPs providing clearing services are allowed to run commercially viable and risk prudent businesses. It is noted that the FRANDT requirements should not result in price regulation nor in an obligation to contract and CSPs should be permitted to control the risks related to the clearing services offered, such as counterparty risks.
So, with feeling, but perhaps some numbness at extremities:
- Fairness and transparency in relation to fee, costs and general contractual terms. This clearly only applies where you do trade, and is more or less of a piece with the TCF rules in the the FCA handbook.
- Reasonable commercial terms to ensure “unbiased and rational contractual arrangements”. To this old fellow, this is a bit of a lunge into areas a regulator really ought to have no business going: the rationality of a clearing member’s business selection is surely sorted out by its own P&L,its own sense of its moral fibre and reputational management. This incentive ought to be enough to ensure it offers equivalent terms to equivalent clients. All ESMA can really muster in defence of this principle is:
- clearing clients should be treated fairly, and all contracts should be on arm’s length terms, meaning that the two parties should owe no special obligation or privilege to the other party. This approach would set the grounds for unbiased and rational contractual terms. This is also reflected under the new requirement to manage and control any conflict of interest in the provision of clearing services. Also, whilst stipulating the requirements for commercial terms has to be reasonable, one has to bear in mind the underlying contractual freedom.
- A dealer shouldn’t be forced into trading, that is to say, but at the same time it should endeavour not to be a dick about it. It is hard to see how a regulator could take a hard line about it.
- 'fair and non-discriminatory basis suggests a clearing member shouldn’t stuff unglamorous clients in favour is the sexy platinum ones who are “guaranteed to bring in two bucks a year”. ESMA recommends a standardised onboarding process with clients provising pro-forma RFPs — all very dreary — but again would have the effect of self-policing should clients be minded to expect this approach.
- Risk control criteria need to be “justified”, bearing in mind other regulations on clearing members to manage counterparty risk. so, again, this is no charter for compulsorily forcing clearing members to clear. ESMA again:
- Where a CSP shall decide to offer clearing services to an applicant clearing client, it shall undertake its assessment of such prospective clearing client respecting the FRANDT based principles whilst taking into account the nature, scale and complexity of the prospective clearing client's business and considering risk related aspects.
- So, “do your freaking job, risk department”.
See also