Europe Delays EMIR Discussion

Terry Flanagan

Postponement of trialogue deals setback to achieving G20 objectives.

The Council of the European Union has postponed a discussion of European Market Infrastructure Regulation (EMIR), dealing a setback to efforts to meet the G20’s commitment to achieve reforms in the OTC derivatives markets by the end of 2012.

In a trialogue meeting scheduled for Jan. 23, the Council, the European Commission and European Parliament were to discuss EMIR in the context of updating the Council’s position in negotiations with Parliament.

Informal contacts are underway to arrange a new date with a view to still enabling an agreement on first reading, the Council said.

“It’s unlikely that MiFID/MiFIR and EMIR will be realized at the detailed implementing measures level [in 2012], partly in view of the deadlines but partly also in view of the serious risk consequences of getting this wrong,” Dr. Anthony Kirby, chair of the regulatory committee at ISITC Europe, told Markets Media.

The Dodd-Frank Title VII measures and in Europe (EMIR measures) for OTC derivative trading and clearing are controversial.

Both the DF Title VII and EMIR measures, for example, could in principle be applied from the end of 2012 as direct-effect regulations short of agreeing the detailed implementing measures to satisfy political considerations in the US (or with little or no allowance for Member State transposition into national laws in the EU/EEA), said Kirby.

However, despite the pace of applying self-actuating principles in the U.S., there are some delays with rule-making under the CFTC and therefore there is still much to agree in important areas such as capital and margin provision before either set of measures can take effect in practice.

There is a need for congruence between applying the principles of EMIR versus MiFID II in Europe, plus a need to ensure a consistent treatment of third-country firms (i.e. firms not domiciled in a EU/EEA country). “In terms of the state of preparation in the EU/EEA, it is likely that MiFID II will take effect from the second quarter of 2014,” Kirby said.

The decision to place some elements of MiFID in a directive and others in a regulation (MiFIR) reflects the need to achieve a uniform set of rules in some areas, while allowing for national specificities in others.

As a result, MiFIR sets out requirements on disclosure of data on trading activity to the public, mandatory trading of derivatives on organized venues, and removing barriers between trading venues and providers of clearing services to promote competition.

As a regulation, MiFIR will have the force of law, and will not require transposition into law by Member States. Such a harmonized approach will help avoid confusion in the daily functioning of markets, and minimize opportunities for regulatory arbitrage between Member States.

MiFID, the directive, amends requirements for providers of investment services, and rules regarding investor protection. Also included in the directive are rules applicable to different types of trading venue, providers of market data, and powers to be granted by Member States to competent national authorities.

EMIR call for the clearing of standardized OTC derivatives through CCPs, and the reporting of all derivative contracts to trade repositories, which would have to publish aggregate positions by class of derivatives, thereby offering market participants a clearer view of the OTC derivatives market.

Discussions are currently focused on the procedure for authorizing CCPs, in particular on the powers of a home member state, i.e., the member state of establishment, versus European Securities and Markets Authority (ESMA).

A general approach agreed in October specified that a CCP authorization by a member state could only be blocked by a negative option of the college of supervisors supported by a “unanimity minus one” vote (i.e., all the members of the college, excluding the representatives of the home member state).

But the issue is being reexamined in order to facilitate agreement with the Parliament, which is pushing for a stronger role for the college and for ESMA.

Therefore, the Council has proposed that the home member state can appeal to ESMA for binding mediation in the event that it receives a negative opinion from the college, and that when a sufficient majority (three-quarters of college members), opposed authorization of a CCP, the sufficient majority may put the issue to ESMA for binding arbitration.

Recently, discussions have also covered the duration of a proposed exemption from the clearing obligation for pension schemes and the recognition of CCPs from third countries.

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