Emir Raises Compliance Challenges

Terry Flanagan

The wholesale European energy markets will be subject to an array of regulatory and compliance obligations over the coming years, increasing the pressure of investment in IT to meet these obligations.

The European Markets Infrastructure Regulation (Emir), the Regulation for the wholesale Energy Markets Integrity and Transparency (Remit) and the second Markets in Financial instruments Directive (MiFiD II) will introduce the concept of “big compliance” to the energy markets, in a way previously experienced mainly by the banks.

“With the first trade reporting deadline only months away, there is little time to lose in determining your route to compliance implementation, while getting it wrong could prove costly,” said Dan Smith, head of market development at Trayport, the commodities trading subsidiary of GFI Group.

For market participants trading derivatives in Europe, EMIR outlines a set of rules focusing on trade confirmations, trade reporting, clearing and risk management, all of which are likely to come into effect between the summer of 2013 and early 2014.

Remit requires participants to report pre- and post-trade data to enable the Agency for the Cooperation of Energy Regulators (ACER) to detect potentially abusive behaviors; MiFiD II is still under negotiation, and will take effect in early 2015.

The key regulatory technical standards (RTS) and implementing technical standards (ITS) of Emir came into force on March 15, 2013.

Reporting to trade repositories is scheduled to become mandatory in the fourth quarter of 2013, according to a report by law firm Clifford Chance. The first CCPs will also be authorized in the fourth quarter, while the first clearing obligations will commence in the summer of 2014.

Emir allows counterparties to satisfy their clearing obligations for OTC derivatives by using indirect clearing arrangements through a client of a clearing member.

The adopted RTS specify the permitted arrangements and impose obligations on CCPs. Clearing members and clients involved in indirect clearing, according to Clifford Chance.

For energy market participants, trade reporting threatens to be a complex process, increasing costs and administrative burden. It will require information that currently resides across the enterprise as well as outside it to be pooled together, standardized and delivered, Smith said in a white paper.

The trade reporting requirements of Emir differ to those that are in use for Dodd Frank in many respects, including the scope of data that must be reported (all Exchange Traded Deals and OTC), who must report (everyone) and which side of the deal needs to report (both sides, with the same ID).

“There is a great deal of devil in the detail waiting to be uncovered,” said Smith. “Each problem will take time for market participants to resolve.”

The road map to regulatory compliance starts with trading participants assessing their ability to develop the right systems to carry out the task of regulatory compliance internally, or evaluating whether a third party solution will be the best approach to simplify the confirmation, recording and reporting of trades.

The key factor influencing this decision will be the necessity to achieve the right end result – a platform that enables compliance, provides efficiencies whilst mitigating risks and is flexible in adapting to new rules as they emerge.

“Energy trading firms may face an uphill struggle,” said Smith. “Deadlines are constantly changing, dependencies are often ill defined and future requirements are hard to determine and predict.”

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