Europe Regulators Go Into Overdrive

Terry Flanagan

ESMA must complete level 2 implementation of EMIR by September.

Europe’s principal securities regulator will need to crank up its rulemaking machinery now that OTC legislation is at hand.
The situation is not unlike that faced by U.S. regulators, who are still trying to finalize regulations under the Dodd Frank Act, which was signed into law by President Obama in July 2010.

In Europe, derivatives lawmaking is currently divided between European Market Infrastructure Regulation (EMIR), which deals with central clearing and trade repositories, and Markets in Financial Instruments Regulation (MiFIR), which deals with trade execution.

A text of EMIR was agreed earlier this month by the Council of the European Union and European Parliament.
EMIR now gets handed off the European Securities and Markets Authority (ESMA), which is tasked with creating implementation rules, known as level 2 in the regulatory process.

ESMA will need to have level 2 rules in place by end of September so that they can be approved by the Commission by the end of December, Jacqui Hatfield, partner in the financial services régulation practice at Reed Smith in London, told Markets Media.

“Level two rules will need to specify which derivatives contracts should be standardized, ensure the regulation is consistent with other international reforms, and determine the types of assets eligible for initial and variation margin,” said Hatfield. “ESMA will do their utmost to meet the deadline. My concern is that it will be too rushed.”

In Europe, the development of financial service industry regulations is prescribed by the Lamfalussy Process, which is composed of four levels, each focusing on a specific stage of the implementation of legislation.

At the first level, the European Parliament and Council of the European Union adopt a piece of legislation, establishing the core values of a law and building guidelines on its implementation.

The law then progresses to the second level, where sector-specific committees and regulators advise on technical details, then bring it to a vote in front of member-state representatives.

At the third level, national regulators work on coordinating new regulations with other nations. The fourth level involves compliance and enforcement of the new rules and laws.

EMIR and MiFID/MiFIR, as massive as they are, are but two of the major regulatory initiatives underway in Europe.
ESMA has released a consultation on possible implementing measures for the Alternative Investment Fund Managers Directive (AIFMD).

AIFMD aims to increase transparency of alternative investment funds and mangers. In this context, ESMA’s advice specifies the form and content of information to be reported to competent authorities and to investors.

AIFMD stipulates that fund managers whose assets under management fall below a threshold of 100 million Euros without the use of leverage (or 500 million Euros with the use of leverage) will be exempt, but may choose to opt in, in which case they would be subject to all rights and responsibilities granted under AIFMD.

In October 2011, the European Commission proposed replacing Market Abuse Directive (MAD) with a Regulation on Market Abuse (MAR), also known as MAD II.

The original MAD, which was adopted in 2004, addressed market abuse such as insider dealing and market manipulation.
As a regulation, MAR will have the force of law, and will not require transposition by Member States.

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