The European Insurance and Occupational Pensions Authority (EIOPA) published today its final technical advice to the European Commission on the standard formula capital treatment of insurers’ direct exposure to qualifying central clearing counterparties (CCPs). This advice aims to more closely align the treatment of such exposures under Solvency II with their treatment under the Capital Requirements Regulation.
(Re)insurers in the European Economic Area (EEA) have up until recently only used central clearing facilities indirectly – through the intermediation of a clearing member – for their derivatives transactions. While Solvency II does prescribe a specific treatment for these indirect arrangements, direct exposures to CCPs have not been accounted for so far and as such would be treated as bilateral exposure, resulting in higher capital requirements.
However, clearing houses have in the meantime evolved their access models to allow (re)insurers to become direct members of CCPs, such as under the so-called ‘sponsored model’.
To address concerns about risk-sensitivity and potential disincentives to direct clearing, EIOPA advises extending the treatment of indirect exposures to direct exposures and further aligning the treatment of default fund contributions with the risk-sensitive approach taken under the Capital Requirements Regulation.
Background
EIOPA’s technical advice comes as a response to a Call for Advice by the European Commission. It benefitted from feedback from stakeholders during a public consultation and a stakeholder event.
Notes
Central counterparties are financial institutions that play a crucial role in the global financial system. They act as intermediaries in the settlement of transactions involving derivatives, securities and other financial instruments. By centralizing the clearing process, they simplify financial transactions through the netting of bilateral exposures and significantly reduce counterparty and settlement risks.
Details
- Publication date
- 30 January 2025