How much capital must a CCP hold, and how do large exposure limits treat CCPs?

A central counterparty (CCP) interposes itself between the parties to a trade, becoming the buyer to every seller and the seller to every buyer. If a clearing member defaults, the CCP must still perform its obligations to everyone else, which is why EMIR sets strict prudential rules for CCPs. A CCP is authorised by the competent authority of the Member State where it is established, and the authorisation is valid throughout the EU (Article 14). No CCP is authorised in Cyprus, so Cypriot firms clear through CCPs established elsewhere.

Article 16 sets a floor and a purpose. To be authorised, a CCP needs permanent and available initial capital of at least €7.5 million, but that is only the entry level. Its capital, with retained earnings and reserves, must be proportionate to the risks it runs, and it must always be enough for two things: to wind down or restructure its activities in an orderly way over an appropriate period, and to protect the CCP adequately against market, credit, counterparty, operational, legal and business risks that its specific financial resources under Articles 41 to 44 (margins, default fund, other resources and liquidity) do not already cover. Delegated Regulation (EU) No 152/2013, drafted by the EBA, sets out the detail. Capital and default resources are kept apart: the other pre-funded resources a CCP holds for member defaults may not be used to meet its capital requirement.

A CCP also puts its own money at risk. Under Article 45, losses from a member's default are met first from that member's margins, then from its default fund contribution, then from the CCP's dedicated own resources, and only then from the contributions of members that have not defaulted. Delegated Regulation (EU) No 153/2013 sets these dedicated own resources, often called skin in the game, at no less than 25% of the capital the CCP must hold under Article 16 and Delegated Regulation (EU) No 152/2013. That is its risk-based capital requirement, not just the €7.5 million floor, and the CCP recalculates the amount every year. This gives the CCP a direct reason to manage risk prudently.

Large exposure limits stop a firm losing too much if a single client or group of connected clients fails. For credit institutions and Class 1-minus CIFs they are in the Capital Requirements Regulation (CRR). The exam material caps a firm's net exposure to one client or connected group at 25% of its eligible capital and, where an institution is involved, at the higher of 25% of eligible capital and €150 million. Since 28 June 2021 the CRR, as amended by Regulation (EU) 2019/876, has measured the limit against Tier 1 capital instead, after credit risk mitigation. Where the client is an institution or investment firm, or a connected group includes one, the limit is the higher of 25% of Tier 1 and €150 million, provided exposures to the group's other members stay within 25%; where €150 million is more than 25% of Tier 1, the firm sets its own limit, never above 100% of Tier 1. Class 2 CIFs apply the Investment Firms Regulation (IFR) instead, with a comparable limit of 25% of own funds for trading-book exposures and the same €150 million alternative. The general rules are in How are sovereign and public-sector exposures risk-weighted, and what are the large exposure limits?

The exam material says CCPs enjoy an explicit exemption from the large exposure rules, because the nature of their business means they easily exceed the limit. One point needs correcting and one needs adding. It is not the CCP that is exempted but the exposures other firms hold towards it. And the exemption is in the CRR, not in EMIR. Under Article 400(1) of the CRR, a clearing member's trade exposures and default fund contributions to a qualifying CCP, and certain client trade exposures, are exempt from the limit. The CRR has exempted such exposures since it first applied in 2014, in its present wording since 28 June 2021. For Class 2 CIFs, Article 41 of the IFR likewise excludes exposures to CCPs and default fund contributions. In practice this lets a firm clear all its trades through one authorised or recognised CCP without breaching the limit, even though every cleared trade creates an exposure to that CCP.