Emir Timeline Becomes Clearer

Terry Flanagan

The immediate roadmap ahead for Europe’s over-the-counter derivatives regulation has been mapped out by the region’s securities regulator.

Although the new European Markets Infrastructure Regulation (Emir) has technically been in force since last summer, its regulatory requirements are only now beginning to take hold.

“An important milestone was passed in the regulation and supervision of OTC derivatives in the European Union, when the Emir technical standards drafted by Esma entered into force,” said Steven Maijoor, chair of the European Securities and Markets Authority (Esma) in a recent speech in the Netherlands.

“As a result, the various provisions of Emir started applying from March 15.”

These provisions include some risk mitigation techniques that have started applying in the mark-to-market/mark-to-model and timely confirmation; non-financial counterparties have started counting their positions against the clearing thresholds and have started notifying the national competent authorities (NCAs) and Esma if they are above the clearing threshold; and trade repositories can start applying to Esma for registration and central counterparties (CCPs) can start applying to NCAs for authorization under Emir.

The new rules are part of a global push to see all standardized over-the-counter derivatives contracts pushed through centralized clearing and on to exchange-like venues in a bid to increase transparency and reduce systemic risk.

The U.S., the other main global derivatives hub, with its Dodd-Frank Act, is slightly ahead of Europe in unleashing the reforms although some of the detailed new rules on both sides of the Atlantic have still yet to be agreed upon by policymakers.

Emir has had a rocky ride through Brussels and its final passage was nearly blocked by the European parliament’s influential economic and monetary affairs committee, who voted against the technical standards last month. The parliament then immediately withdrew this motion after strong-arm tactics from the European Commission. Any further delay may have jeopardized the EU’s commitment to the G20 group of nations in its global push to regulate the OTC derivatives landscape.

“Despite the care we take in our work, Esma can make mistakes of a technical nature and I fully respect the powers of the European parliament and the Council to scrutinize our work,” said Maijoor.

“However, the technical standards are by their nature of a purely technical nature. Scrutiny of our standards should not result in re-opening the difficult political decisions that were taken when Emir was adopted by the European parliament and the Council. I am convinced that those decisions were fully respected by, and reflected in, our standards.”

Maijoor also revealed what is in store for market participants in the coming months with the Emir regulation.

“Three months after the registration of trade repositories, the reporting obligation will start applying to all derivative transactions,” he said. “So we expect this obligation to start applying from mid-September. Trade repositories will play a key role in the reporting obligation and Esma has now begun their registration process.

“For this, we have established a dedicated team which we are further expanding for the supervision of trade repositories which will start after their registration.

“Six months after the authorization of CCPs, and following the notification to Esma by NCAs of that authorization, Esma needs to issue technical standards identifying the classes of derivatives subject to the clearing obligation. These standards are not expected to enter into force before the end of this year, and after the entry into force a phasing-in period is expected.”

Maijoor also mentioned that two technical standards have not yet been delivered. They are regarding bilateral clearing and defining which OTC derivatives contracts have a direct, substantial and foreseeable effect within the European Union.

“The reasons for the non-delivery of [the bilateral clearing standards] is to take into account the development of international standards on the same matter,” said Maijoor.

“For the second set of standards, on the international reach of Emir, we want to take into account the on-going discussions with regulators of other jurisdictions on the cross-border application of their provisions.”

In addition, Maijoor revealed that pension funds will receive a temporary exemption from Emir regarding the clearing obligation as pension funds do not currently have the cash needed to provide margins to CCPs.

“A revision of this exemption is envisaged in 2015 and by that time it is expected that CCPs will have developed the appropriate arrangements to allow pension funds to centrally clear,” said Maijoor.

Meanwhile, in Australia its regulator has just proposed draft rules to address mandatory trade reporting obligations for OTC derivatives in line with G20 commitments.

The Australian Securities and Investment Commission (ASIC) is also considering adopting transaction reporting regimes in line with the EU and U.S. that are aimed at ensuring consistency across jurisdictions.

“This is an important step in Australia’s implementation of the G20 OTC derivatives commitments,” said Belinda Gibson, deputy chairman of ASIC. “The proposed regime will improve the integrity and stability of Australia’s OTC derivative markets.”

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