Time Running Out To Get in Shape For Emir

Terry Flanagan

The latest milestone for regulation regarding the over-the-counter derivatives market in Europe passed somewhat un-noticed last week, but market participants are warning that firms must be well on the way towards complying with these soon-to-be-implemented rules.

Back in 2009, following the global financial crisis, the G20 group of nations demanded that regulators around the world draw up rules that would centralize and manage counterparty credit risk and increase transparency in the opaque $700 trillion OTC derivatives sector, which was blamed, among other things, for the collapse of U.S. investment bank Lehman Brothers in September 2008.

The deadline set by the G20 for regulators to better govern the OTC derivatives markets was meant to be the end of this year but, in Europe at least, it appears that this wish will only now be met from July next year at the earliest.

Last week, on August 16, the European Market Infrastructure Regulation (Emir) finally came into force across the European Union following the European parliament’s final seal of approval in March. However, large parts of Emir are not yet effective as the deadline for the technical standards, which the European Securities and Markets Authority (Esma), the pan-European regulator, is busily preparing are not due until September 30.

“August 16 was the date that EMIR became binding across Europe,” Dr Christian Voigt, business solutions architect at Fidessa, a trading technology company, told Markets Media. “However, a number or technical standards are still missing that need to be completed.”

The September 30 deadline date for the technical standards thus appears to be a more crucial date as to how Emir will eventually shape up; after that the new derivatives trading landscape in Europe will probably become clear. But waiting until then may not be an option.

“Firms either are or should be working on Emir as they need to get as prepared as possible since there will not be much time left once the technical standards are agreed,” said Voigt. “You can assume that any implementation schedule, once published, will be far from generous.

“Most of our clients are attempting to organize the framework and set up general requirements. We already know, for example, that there will be a number of derivatives which will be cleared mandatorily and some that will not. It is wise to be estimating where you believe the regulations will go.

“It has been roughly agreed that both a top down and a bottom up approach will be needed, but no-one has stated what it will mean in reality; for example, whether a specific interest rate future or a specific swap will actually be required to be cleared.”

“There is a lot of potential for the technical standards to take Emir in a particular direction but we don’t know yet what that will be.

“But we do know today that there will be massive changes from the middle of 2013 so everyone is advised to set up a framework and allocate resources, time and money to this now.”

Firms are also being warned that the new OTC derivatives rules in Europe will cause huge strains from a data angle. Emir is calling for all derivative trades, both cleared and non-cleared, to be reported to a trade repository for the first time in a bid to increase transparency.

“The need to centrally collect and report data held in trade repositories has huge implications on a firm’s data management infrastructure as well as its governance processes,” John Mitchell, vice-president of sales at Asset Control, a provider of financial data management solutions, told Markets Media.

“The impact is particularly significant as the majority of current systems were not built to cope with the onslaught of requests for greater transparency the markets are currently witnessing.

“Financial institutions will require some form of interface between their own data management system and that of the trade repository—and it will need to be an automated interface given the well-known perils and risks associated with manual processing. They will also need to adopt standardized classification of derivative products.

“Without standardization, it is difficult—if not impossible—to accurately collateralize against them. This adds yet more weight to the move towards the adoption of LEIs [Legal Entity Identifiers]. Preparing for the current changes and the plethora of new demands on the horizon requires a fresh and strategic approach to data management. The changes to OTC derivatives markets are simply the latest driver to update the approach to data. There will be many more to come.”

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