Derivatives – Insights – Derivatives | Edition No. 3/2017

EC

European Commission proposes EMIR reform

On 4 May 2017, the European Commission (EC) published its proposal on the reform of the European Markets Infrastructure Regulation (EMIR) following a public consultation. The main changes to EMIR as proposed by the EC can be summarized as follows:

Reporting:

In order to streamline the reporting obligations for all counterparties, the EC proposed that:

• Exchange-traded derivatives should have to be reported only by the central counterparty (CCP) on behalf of both parties;
• Transactions between small non-financial counterparties (NFCs) and a financial counterparty (FC) should only have to be reported by the FC on behalf of both parties;
• Intragroup transactions should not have to be reported any longer if one of the counterparties is an NFC; and
• The obligation to report historical data (“backloading”) should be removed.

But not everyone is convinced the proposal will sufficiently facilitate EMIR reporting. In fact, some market participants expect the changes to cause additional confusion as to who is responsible for reporting the client leg of the transaction to the CCP. Moreover, NFCs are afraid of misreporting by the FCs.

Clearing:

Furthermore, the proposal aims at reforming the clearing obligation for NFCs by reducing it only to the asset classes for which they have breached the clearing threshold.

A clearing threshold is introduced for small FCs. Only FCs exceeding that threshold would be obliged to clear centrally.

Pension Funds:

Finally, consideration has been given to pension funds and a three-year temporary exemption from central clearing is granted to them.

Further information

EC Proposal for EMIR Amendment

EC

EC proposes more robust supervision of CCPs

On 13 June 2017, the European Commission (EC) proposed reforms to ensure a more consistent supervision of Central Counterparties (CCPs) in the EU. The proposal is widely interpreted to aim at forcing London based CCPs to move into the EU in the course of the Brexit.

Due to the growing importance of CPPs in the financial sector and to the UK’s withdrawal from the EU, the EC deems it necessary to adopt new measures in the regulation and supervision system of clearing in Europe. Thus, the EC proposed an assessment of the supervisory arrangements for CCPs.

To achieve this, a newly-created supervisory mechanism shall be established within European Securities and Markets Authority (ESMA) (“CCP Executive Session”), which will be responsible for ensuring a more coherent supervision of EU CCPs and more robust supervision of CCPs in non-EU countries.

In addition, the proposal introduces a new “two tier” system for classifying third-country CCPs. Non-systemically important CCPs will continue to be able to operate under the existing European Market Infrastructure Regulation (EMIR) equivalence framework. However, systemically important CCPs (so-called Tier 2 CCPs) will be subject to stricter requirements.

Depending on the significance of the third-country CCPs’ activities for the EU and Member States’ financial stability, a number of CCPs may be of such systemic importance that the requirements are deemed insufficient to mitigate the potential risks. In such instances, the EC, upon request by ESMA and in agreement with the relevant central bank can decide that a CCP will only be able to provide services in the EU if it establishes itself in the EU.

With London currently being the global center of euro clearing (i.e. the clearing of derivatives priced in euros), the EC proposal can be seen as an attempt to use the future of euro clearing as a bargaining chip during the upcoming Brexit negotiations.

Further Information

European Commission – Press release

EU

Recent developments on EMIR application and supervision

Recently, there have been several new developments regarding the application and / or supervision of the European Markets Infrastructure Regulation (EMIR), including:

Clearing obligation for Category 3 counterparties

On 29 April 2017, the Commission Delegated Regulation (EU) 2017/751 amending Delegated Regulations (EU) 2015/2205, (EU) 2016/592 and (EU) 2016/1178 as regards the deadline for compliance with clearing obligations for certain counterparties dealing with OTC derivatives was published in the Official Journal of the EU. Thus, the start of the clearing obligations under EMIR for counterparties in Category 3 (in particular, small financial counterparties) is now officially postponed until 21 June 2019. It might also be completely removed following the recent proposal of the European Commission (see above). For additional information please also refer to our previous newsletter.

ESMA’s Guidelines on CCP conflicts of interest management

The European Securities and Markets Authority (ESMA) published on June 1, 2017 a consultation paper on future guidelines regarding the management and avoidance of conflicts of interest by central counterparties (CCPs). The consultation will last until August 24, 2017.

List of CCPs

On 7 June 2017, ESMA published an updated list of central counterparties authorized to offer services and activities in the EU in accordance with EMIR.

List of exempted entities

On June 10, 2017, the Commission Delegated Regulation (EU) 2017/979 amending EMIR with regard to the list of exempted entities was published in the Official Journal of the EU. Hereby, central banks and other public bodies managing debt of the following third countries will be exempted from EMIR: Australia, Canada, Hong Kong, Mexico, Singapore and Switzerland.

ESMA

MiFID II / MiFIR developments

The most relevant recent developments regarding MiFID II / MiFIR in the context of derivatives, markets and trading affect, inter alia, the following areas:

OTC derivatives traded on a trading venue

The European Securities and Markets Authority (ESMA) published on 22 May 2017 an opinion on the concept of traded on a trading venue (TOTV). ESMA is of the view that only OTC derivatives sharing the same reference data details as the derivatives traded on a trading venue should be considered TOTV. Same reference data details are determined in Table 3 of the Commission Delegated Regulation (EU) 2017/585.

Trading obligation for derivatives

On June 19, 2017, ESMA published the consultation paper “The trading obligation for derivatives under MIFIR” regarding its relevant draft technical standards. Consultation will be open until July 31, 2017.

Position limits

On 7 June 2017, the Commission Implementing Regulation (EU) 2017/953 laying down implementing technical standards with regard to the format and the timing of position reports under the revised Markets in Financial Instruments Directive (MiFID II) was published in the Official Journal of the EU.

Furthermore, on 31 May 2017, ESMA published an opinion determining third-country trading venues for the purpose of position limits under MiFID II. ESMA clarified that commodity derivatives traded on third-country trading venues should not be regarded as OTC trades and, thus, positions stemming from these trades should not fall into the EU position limit regime. The third-country venues should meet the objective criteria of operating a multilateral system, being subject to authorization, supervision and enforcement.

Questions and Answers on MiFID II / MiFIR

On 31 May, ESMA also updated its Questions and Answers (Q&As) on practical questions regarding the implementation of MiFID II and MiFIR.

EN

BaFin issued a general order about “contracts for difference” (CFDs)

On 8 May 2017, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) issued a general order (Allgemeinverfügung) pursuant to § 4b paragraph 1 of the German Securities Trading Act (Wertpapierhandelsgesetz, WpHG). Hereby, BaFin limits the marketing, distribution and sale of contracts for difference (CFDs). Contracts with a margin call may no longer be offered to private customers.

Further information

General order about CFDs