10.05.2011
By Terry Flanagan

EMIR Clears European Council

Regulation calls for open access to clearinghouses and trade flows.

The Council of the European Union has agreed on a text of European Market Infrastructure regulation (EMIR) that will guarantee open access to clearinghouses for OTC derivatives, while ensuring that clearinghouses have unfettered access to data feeds from execution venues.

Those conditions are present in the Dodd-Frank At as well as Markets in Financial Instruments Directive (MiFID II).

The Council on Tuesday set out its position with a view to negotiations with the European
Parliament on a draft regulation aimed at increasing transparency and reducing risk in the over-the-counter (OTC) derivatives market.

The compromise proposal provides for venues of execution to have access to any CCP to
clear OTC derivatives transactions and, subject to conditions, for CCPs to have access to
the trade flows from trading venues.

Trade repositories would have to publish aggregate positions by class of derivatives,
thereby offering market participants a clearer view of the OTC derivatives market. The
European Securities and Markets Authority (ESMA) would be responsible for the
surveillance of trade repositories and for granting and withdrawing their registration.

EMIR and MiFID II put Europe on track to meet its G20 obligations by 2012, as well as to harmonize with Dodd-Frank in the United States.

The draft regulation calls for reporting of all derivative contracts to trade repositories and the clearing of standardized OTC derivative contracts through central counterparties (CCPs) in order to reduce counterparty risk (i.e. the risk of default by one party to the contract).

The regulation is aimed at implementing commitments made by G-20 leaders in September 2009. It would apply from the end of 2012.

The compromise proposed by the presidency allows room for further technical work, in
the context of trilogue negotiations with the European Parliament, on how to negotiate and bring into force arrangements with third countries.

Since the original EMIR was proposed by the European Commission in Sept. 2010, both the European Parliament and the Council have been trying to resolve differences on areas such as interoperability, third-country CCPs, and whether the legislation should extend to listed as well as OTC derivatives.

Market groups have urged European regulations to provide open access for both OTC and listed products.

A group of buy- and sell-side trade associations, in a letter to the European Commission, has argued for explicit and detailed open access requirements—governing clearing of all financial instruments—in EMIR now, and in MiFID in due course.

Opening listed derivatives to the regulatory regime would bring Deutsche Borse under the open access provisions of EMIR and would dilute or eliminate the competitive advantage currently enjoyed through linking clearing and trading together.

Proponents of opening EMIR to listed derivatives say that EMIR should not be allowed to embed monopolies in clearing and that vertical silos must be subject to fair and open access requirements.

The European Commission’s proposals on MiFID II extend the original MiFID’s scope far beyond equities to require that OTC derivatives be traded on central exchanges.

The proposals will be formally unveiled on Oct. 21, with adoption of new rules expected in 2013.

As regulations, both EMIR and MiFID II will apply directly in member states without the need for transposition into local law.

MiFID II will require that CCPs provide non-discriminatory access to clearing of financial instruments regardless of the trading venue on which a transaction is executed.

Concomitantly, it will require trading venues to provide trade feeds on a non-discriminatory basis upon request to any CCP that wishes to clear financial transactions executed on that venue.

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