Europe Reaches Deal on OTC Reforms

Terry Flanagan

Clearing and transaction reporting legislation finalized.

A compromise deal on new EU legislation to regulate trade in OTC derivatives has been struck by the European Parliament and the Council of the European Union.

OTC derivatives legislation, known as European Market Infrastructure Regulation (EMIR), calls for mandatory clearing of most swaps and reporting of swaps transactions to a trade repository.

The Council of the European Union had updated its position on EMIR in negotiations with the European Parliament. This was designed to facilitate rapid agreement with Parliament, so as to enable the regulation to be adopted in first reading.

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 had been reexamined in order to facilitate agreement with the Parliament, which is pushing for a stronger role for the college and for the European Securities and Markets Authority (ESMA).

Werner Langen, a member of Parliament who steered EMIR, said that “the Council accepted a strong role for ESMA,” and hailed the deal as a “big step towards a more transparent and safe market for OTC derivatives.”

The bill will need final approval from Parliament as a whole and the Council. The legislation will enter into force 20 days after publication in the Official Journal.

Langen said that he hoped to secure a good majority in favor in the plenary vote.

Parliament secured a stronger role for the college of supervisors and for ESMA, which would make it easier to block an authorization of a CCP. The deal provides for binding mediation by ESMA in disputes between national authorities over the authorization of CCPs.

The other huge piece of legislation in Europe is MiFID/MiFIR, which mandates that derivatives that are deemed eligible for clearing and are sufficiently liquid be traded on regulated markets, MTFs, or organized trading facilities (OTFs).

“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,” Dr. Anthony Kirby, chair of the regulatory committee at ISITC Europe, told Markets Media. “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.”

Negotiations over the past weeks have produced compromise on the issue of CCPs from third (non-EU) countries.
ESMA will also be responsible for the identification of contracts subject to the clearing obligation, while national competent authorities, in coordination with the college of supervisors, will be responsible for authorization and supervision of CCPs, except in the case of CCPs from third countries, which would have to be recognized by ESMA.

The obligation to clear OTC derivatives contracts through a CCP and report them to trade repositories would apply to financial firms, while no-financial firms would only be subject to the clearing obligations, provided their OTC positions reach certain thresholds set by ESMA and the European Commission.

The compromise proposal provides for venues of execution, such as multilateral trading platforms or exchanges, to have access to any CCP to clear OTC derivatives transactions, and vice versa.

All derivative contracts (not just OTC derivatives), will have to be reported to a trade repository. Trade repositories will be required to publish aggregate positions by class of derivatives.

ESMA will be responsible for the surveillance of trade repositories and for granting and withdrawing their registration.

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