even with its third anniversary coming up this July, EMIR is far from being a task to cross off from your to-do list yet. While certain requirements and procedures provided for under EMIR are yet to be implemented or completed, the review of EMIR has already begun. Therefore, the current edition of Insights – Derivatives once again focuses on this central piece of European derivatives regulation.
Please find below the latest most relevant developments concerning EMIR.
On 21 May 2015 the European Commission (EC) has begun a public consultation to consider the design, implementation and reality of the European Market Infrastructure Regulation (EMIR). Under Art. 85 (1) EMIR the EC is obliged to review and prepare a general report on EMIR to submit it to the European Parliament (EP) and the Council.
According to Art. 85 (1) a – e EMIR the EC must, in particular, assess a number of specific aspects, including the access of CCPs to central bank liquidity facilities, the impact of EMIR on the use of OTC derivatives by non financial firms, the functioning of the supervisory framework for CCPs (including CCP colleges) and efficiency of margining requirements. The EC will seek input from the European System of Central Banks (ESCB), the European Securities and Markets Authority (ESMA) and the European Systemic Risk Board (ESRB) on these topics in accordance with its mandate for the review.
Since certain requirements and procedures provided for under EMIR are yet to be implemented or completed (e.g. clearing obligation, exchange of collateral) the report will focus primarily on those aspects of EMIR which have already been implemented.
The report has to be submitted by 17 August 2015. A public hearing took place on 29 May 2015. The close of the public consultation will be on 12 August 2015.
Please find here the public consultation.
The European Securities and Markets Authority (ESMA) has on 21 May 2015 published an opinion on the composition of the CCP Colleges to clarify which authorities qualify as college member under Art. 18 (2) (c) EMIR following the establishment of the Single Supervisory Mechanism (SSM) and the affect on the composition of the CCP colleges.
For each EU-based CCP a CCP college consisting of relevant national regulators and ESMA is established. These colleges are responsible for authorising and supervising EU CCPs.
According to Art. 18 (2) EMIR, the college composition shall include, among other authorities, the competent authorities responsible for the supervision of the clearing members of the CCP that are established in the three member states with the largest contributions to the default fund of the CCP referred to in Art. 42 EMIR on an aggregate basis over a one-year period.
Following the establishment of the SSM the ECB may take over direct prudential supervision of the clearing members with the largest contributions to the default funds, however the national authority can still maintain other supervisory responsibility (e.g. financial conduct) over the same clearing members. Therefore, ESMA wants to clarify which authorities will qualify as a college member under Art. 18 (2) (c) EMIR and how many voting rights the ECB will hold as a college member.
The European Securities and Markets Authority (ESMA) has opened on 11 May 2015 its 4th consultation seeking stakeholders’ views on proposed Regulatory Technical Standards (RTS) on the clearing obligation under EMIR.
The current consultation aims at complementing the rules on the clearing obligation for interest rate swaps (IRS) denominated in the G4 currencies (EUR, GBP, JPY and USD) as published in ESMA’s final report of 1 October 2014 by introducing rules for the clearing of IRS denominated in other EEA currencies (CZK, DKK, HUF, NOK, PLN and SEK).
The paper is structured in different sections. Section 3 provides an overview of the clearing obligation procedure. Section 4 provides clarifications on the structure of the classes of OTC interest rate derivatives that are proposed for the clearing obligation. Section 5 includes the determination of the classes of OTC derivatives that should be subject to mandatory clearing with an analysis of the relevant criteria. Section 6 presents the approach for the definition of the categories of counterparties, and the proposals related to the dates from which the clearing obligation should apply per category of counterparties. Section 7 provides explanations on the definition of the minimum remaining maturities for the application of frontloading.
On 22 May 2015 the European Securities and Markets Authority (ESMA) has published an opinion on the impact of EMIR on UCITS. In this opinion to the EU institutions, ESMA calls for a modification of Art. 50 (1) (g) (iii) and 52 of the UCITS Directive (Directive 2009/65/EC) to take into account the clearing obligation of certain types of OTC financial derivative transactions under EMIR.
Under EMIR, certain OTC financial derivative transactions are subject to the clearing obligation. Therefore, the question arises as to how the limits on counterparty risk in OTC financial derivative transactions that are centrally cleared should be calculated by UCITS and whether UCITS should apply the same rules to both OTC financial derivative transactions that are centrally cleared and exchange-trade derivatives (ETDs).
In this context, ESMA offers the opinion that the UCITS Directive should no longer distinguish between OTC financial derivative transactions and ETDs. Instead, the distinction should be between cleared financial derivative transactions and non-cleared financial derivative transactions.
While ESMA sees no necessity to modify the UCITS Directive with regard to OTC financial derivative transactions that are not centrally cleared, ESMA proposes that for centrally cleared financial derivative transactions the details of the clearing arrangements should be taken into account to assess the counterparty risk.
On 5 June 2015 the European Commission (EC) agreed on an extension of the, already existing, exemption from the clearing obligation for Pension Scheme Arrangements (PSAs) by two years. The clearing obligation for PSAs will therefore not apply until 16 August 2017.
The delegated act extending the exemption will enter into force on the day following the publication in the Official Journal of the European Union.
Please find here the delegated act.
The European Supervisory Authorities (ESAs) published on 10 June 2015 a second consultation on draft Regulatory Standards (RTS) outlining the framework of the European Market Infrastructure Regulation (EMIR).
This second consultation paper builds on the proposals outlined in the first consultation paper published in April 2014. The ESAs, after reviewing all the responses to the first consultation, engaged in intensive dialogues with other authorities and the industry stakeholders in order to identify operational issues that may arise from the implementation of this framework. Therefore, the ESAs are specifically seeking feedback on a narrow set of topics as most of the issues which arose in the last consultation paper have been addressed in this amended version of the RTS.
For those over-the-counter (OTC) derivative transactions that will not be subject to central clearing, these draft RTS prescribe the regulatory amount of initial and variation margin that counterparties should exchange as well as the methodologies for their calculations. In addition, these draft RTS outline the criteria for the eligible collateral and establish the criteria to ensure that such collateral is sufficiently diversified and not subject to wrong-way risk. Furthermore, following the amendments of the standards issued by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) in March 2015, these RTS include a revised phase-in for initial margin requirements and a new phase-in for variation margin.
The deadline for submission of comments to the draft RTS is 10 July 2015.
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