CCPs Welcome European Derivatives Law

Terry Flanagan

EMIR now moves to Level 2, or implementation, phase.

Now that Europe has finalized legislation mandating that most OTC derivatives be centrally cleared, clearinghouses plan to work with regulators to provide input on conforming regulations.

The European Securities and Markets Authority (ESMA) will be responsible for the identification of contracts subject to the clearing obligation, while national competent authorities, in coordination with the college of supervisors, will be responsible for authorization and supervision of CCPs, except in the case of CCPs from third countries, which would have to be recognized by ESMA.

“Technical details, that is, Level 2 regulations, have to be drafted now by ESMA and adopted by EU-Commission,” Marcus Zickwolff, chairman of the European Association of Central Counterparty Clearing Houses (EACH), told Markets Media.

EACH encourages the use of standardized products and services and supports measures to improve safety, integrity and efficiency of financial markets.

Although individual CCPs and associations like EACH have no direct role in the legislative and regulatory process, it is EACH’s objective to partner with policymakers and to ensure a constructive working relationship with supra-national European and global public authorities and global associations of clearing houses, Zickwolff said.

EACH develops positions on proposed European and global regulatory initiatives relative to central counterparty clearing especially on OTC derivatives.

CCPs, together with other affected market participants are invited by authorities like ESMA, or institutions like the EU Commission, to contribute to consultations and discussions, or to participate in working groups.

“Authorities and institutions request expertise from market participants for various topics,” Zickwolff said. “As a result of consultations, these institutions gain a broad view and can form an opinion, helping them in the regulatory and legislative process they have to pursue.”

EACH currently has 23 CCP members. Its aims are to discuss and analyze techniques in CCP operations, systems, position keeping, risk management, and legal and regulatory issues related to clearing.

The extent to which EMIR will apply to firms that are based outside the EU is one of the more vexing issues facing regulators as they move to Level 2.

On a narrow interpretation of EMIR, a multinational entity would require a parent based in the EU in order to come within the scope of the legislation.

“However, this interpretation would exempt a great number of counterparties and could thus be seen to defeat the very purposes of EMIR,” said McDermott, Will & Emery LLC. “Therefore, it will be necessary for the EC to clarify exactly how groups with a parent based outside the EU are to be affected.”

Equally, it’s not certain how EMIR will impact foreign branches of entities incorporate in the EU. An entity with branches in the EU and the United States, for example, may be subject to obligations arising under both EMIR and the Dodd-Frank Act.
Extraterritorial issues could also arise from MiFID II.

Under MiFID/MiFIR, all OTC instruments that are deemed to be eligible for clearing and are sufficiently liquid will have to be traded on regulated markets, MTFs, or organized trading facilities.

“Under MiFIR Article 24, by reference to EMIR, all derivatives that have been declared subject to the trading obligation, as described under Article 26 in MiFIR, have to be traded on RMs, MTFs or OTFs,” said Zickwolff.

Under Dodd-Frank, OTC derivatives need to be traded on a regulated exchange or on Swap Execution Facilities (SEFs).

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