Emir Presents Quandary

Terry Flanagan

With the first implementing measures of the European Market Infrastructure Regulation (Emir) coming into force, market participants are taking note of the significant degree of overlap between the Emir obligations and the provisions of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which was passed in July 2010.

Both Emir and Dodd-Frank represent the implementation of the G-20′s commitment to improving risk management and reducing systemic risk in OTC derivative contracts by the end of 2012.

“Concerns are growing about the potential application, impact and consistency of the U.S. regulatory framework in other jurisdictions,” said Stephen O’Connor, chairman of the International Swaps and Derivatives Association, at a congressional hearing on Tuesday.

“These issues are raising the prospect that market participants will be subject to duplicative and/or contradictory regulatory mandates from the EU and other non-U.S. jurisdictions that would impose significant costs, fragment market liquidity and potentially create an uneven playing field,” O’Connor said.

Emir applies widely to both financial and nonfinancial counterparties to derivative contracts, including energy derivatives. In particular, new clearing and risk mitigation requirements for uncleared trades will apply to over-the-counter (OTC) derivative contracts, and a new reporting requirement will apply to both OTC and exchange-based derivative contracts. Some of these requirements are already in force.

Emir was agreed by the European Union on August 16, 2012, with the aims of managing counterparty credit risk more effectively and increasing the transparency and stability of OTC derivative markets. Until the first six implementing measures took effect on March 15, 2013, almost all aspects of EMIR had yet to take effect under secondary implementing measures.

Current estimates suggest that the Emir reporting requirement is unlikely to take effect before September 2013 (and then only with respect to interest rate derivatives and credit derivatives) and the first clearing of trades under Emir is unlikely to occur before 2014.

“Nonetheless, this should not be taken to mean that aspects of Emir do not currently impact market participants or that planning for its implementation can be delayed,” said Michael Beaton, a partner at Derivatives Risk Solutions. “In reality, a number of Emir provisions which require an understanding of counterparty classification are already in force and more are looming on the horizon.”

Last July, the Commodity Futures Trading Commission published a proposed Cross-Border Guidance that has been generally characterized as over-reaching and overly prescriptive.

“While the goal has been to harmonize our rules, the over-reaching and prescriptive outcomes in the proposed guidance would likely have the opposite effect and create market fragmentation, regulatory uncertainty and a disincentive to trade with U.S. persons,” said CFTC commissioner Scott O’Malia. “It remains to be seen what the global derivatives market will look like once Europe and Asia implement their derivatives rules and once the Commission defines substituted compliance in such key areas as clearing and trading.”

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