Definition of “Substitutability” of CCPs and the connected reporting of “Alternative Providers” for the purpose of the template Z 09.04 (RESOL II).

Should the concept of substitutability of CCPs, and consequently the identification of alternative providers to be reported in template Z 09.04, be interpreted restrictively, i.e. limited to CCPs or intermediaries that are capable of providing an equivalent clearing service for the same trading venue and/or market(s)? Or should a broader interpretation of substitutability be applied, focusing on the economic function, business and regulatory objectives as well as the post-trade nature of the clearing service, under which a CCP might be substitutable not only by a concurrent CCP active on the same market, but also by: the substitution of the entire trade value chain (e.g. trading venue – CCP – CSD or trading venue – CSD); or the use of an intermediary/broker capable of rerouting either the trading and clearing activity or the transactions executed on behalf of the reporting institution through alternative FMIs, provided that such arrangements achieve a comparable economic and functional outcome for the reporting institution.

According to the reporting instructions (point II.29), substitutability for the purpose of the template Z09.04 is defined as the “ ability of a user to replace the clearing service provider in Z 09.01 column 0020 with an alternative FMI/intermediary with which it has a contractual relationship at the reporting date .”  Subsequently, in the column 0040, the “ name of the FMI or intermediary identified as a potential substitute ” should be reported.  However, considering that in many EU markets, there is only one local CCP servicing the (local/national) stock exchange, the prima facie immediate substitutability options within the same market seem not available. Furthermore, considering that the continued provision of a clearing service will predominantly depend on the ability of the reporting institution to fulfil its contractual obligations (i.e. margin or collateral requirements) towards the CCP, a substitution of one CCP with another one might not be possible in a scenario where the clearing service is discontinued due to the inability of the reporting institution (in resolution) to fulfil its obligations towards the CCP.  Therefore, and considering the purpose of the template Z09.04, which is to identify and monitor the substitutability of the clearing service (as part of the post-trade services), accessed or used the reporting institutions, the template Z09.04 should not be reduced to alternative CCPs, active on the same market(s). On contrary, the reporting institutions should assess the clearing service from an economic perspective of its business model and consider the reasons for using clearing services as well as their intended result when identifying alternative providers or feasible substitutes.  In this sense, and recognizing the interconnectedness of (not only) European markets and post-trade infrastructures and the availability of most traded instruments (securities, derivatives and commodities) across the multitude of trade venues, if the reporting institution is capable of substituting a clearing service by deviating to another trade value chain (including either a CCP or a CSD in case of instruments not subject to a clearing obligation pursuant to Art. 5 EMIR), or by an intermediary or a broker with corresponding connections to suitable trade and post-trade infrastructures without disproportionate costs or timely delays and with the same economic result, these substitutability options should be reported in the template Z09.04.  In this case, the column 0040 should contain the names of all FMIs / Intermediaries involved in the substitution (i.e. for example the name of the alternative stock exchange and the CCP clearing trades concluded on this stock exchange or the intermediary / broker).  This information would, from the perspective of resolution planning, provide valuable insights not only into the interconnectedness of the financial market infrastructures, but regarding the overall substitutability options of a reporting institutions in a resolution, which in reality are most likely to go beyond a 1:1 substitution of FMIs within the same (local) markets.