02.29.2012

Long Road Ahead For Emir

02.29.2012
Terry Flanagan

Despite a deal being reached earlier this month by the European Union over its long-awaited overhaul of derivatives markets, it remains to be seen if the regulation will be in place by the end of the year as planned.

Delaying implementation of the European Markets Infrastructure Regulation, which requires over-the-counter traded derivatives to be processed through clearing houses – thereby meaning that all deals are recorded, would mean Europe missing the deadline imposed by the G20 group of nations for the end of 2012 to introduce far-reaching reforms to the $700 trillion global OTC derivatives market. Emir is being pushed through to meet this deadline.

Policymakers want all OTC derivatives to be traded on electronic platforms and, where possible, be cleared by central counterparties by this date.

It is the first steps Europe has taken since the global financial crisis to put down concrete laws to monitor this previously unregulated sector that accounts for roughly 95% of all derivatives trades.

Emir is being brought in to protect against the potentially catastrophic effects of a big default and the rules are similar to those adopted in the U.S. under the Dodd-Frank Act. Emir goes further than Dodd-Frank in that it lays down a regulatory framework for overseeing EU clearing houses.

It is now up to the European Securities and Markets Authority, an independent EU body, to formalise the detailed reforms of Emir by the end of September before being passed back to the European Parliament and Council of Ministers for adoption before the end of the year.

Some banks and regulators say the deadline for Esma should be moved back to allow for more consultation. And judging by the marathon negotiations and unexpected delays to get Emir to where it is today suggests that it may prove impossible to pass Emir into law before the end of 2012.

Uncertainty is also developing in the market as European firms are not likely to now know until late September at the earliest the exact nature of Emir reforms.

Many European companies already have in place procedures in anticipation of Emir but are having to spend extra on implementation costs just to cover all bases.

A compliance officer at one London-based asset manager, who declined to be named, said: “We have embarked on a significant investment to extend our existing derivatives infrastructure and to create a single platform for bilateral and cleared OTC activity. Our implementation timelines are well ahead of any regulatory timeline.”

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