ESMA sets out how client bank guarantees would enter European clearing

ESMA published final draft technical standards on 19 October for accepting public and bank guarantees as central-counterparty collateral. A commercially important part specifies how commercial-bank guarantees covering non-financial clients would work through clearing members.[1]

The underlying permission comes from EMIR Article 46. It allows guarantees for non-financial clearing members and non-financial clients of clearing members, subject to conditions. A CCP sets its minimum acceptable collateralisation and can allow wholly uncollateralised bank guarantees. This reaches businesses accessing clearing through a broker, alongside those participating directly.[2]

For a commercial-bank guarantee, ESMA’s draft requires account arrangements that attribute it exclusively to the client it covers. The CCP would be the beneficiary; a clearing member could access any remaining amount only after the CCP’s claims were satisfied and where the collateral agreement permits. Client identification and prompt notifications form part of that design.[1]

For clearing brokers, that priority makes the contractual wording consequential. They must establish which exposure the guarantee supports and when any proceeds become available to them. Acceptance by one participant does not make it unrestricted collateral for another.[1]

Article 46 also requires guarantees to be available on demand within the relevant liquidation period, subjects uncollateralised bank guarantees to concentration limits and requires appropriate valuation haircuts. The CCP must consider liquidity risk after a participant defaults. These conditions explain why a promise to pay needs a funding and enforcement assessment even when the guarantor is a bank.[2]

For a corporate hedger, the economic question is whether the guarantee’s price and any backing demanded by its issuer leave more usable liquidity than posting cash or securities. For the clearing broker, the question is whether that arrangement remains workable during a client default. The rules provide a framework for those negotiations; each agreement supplies the actual cost and funding terms.[2]

Commission adoption and subsequent parliamentary and Council scrutiny remain ahead. The final draft is ESMA’s technical recommendation, with commencement linked to publication of an adopted regulation in the EU Official Journal.[1]

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