24.08.2016 | KPMG Law Insights

Derivatives – Insights – Derivatives | Edition No. 4/2016

Dear readers,

In the last weeks the global derivatives market faced a number of developments. Firstly, the Delegated Regulation on the clearing obligation for interest rate swaps and forward rate agreements was published in the Official Journal of the European Union. The rules will take effect depending on the counterparty category.

Secondly, there has been a major update in the credit default swaps market. This relates to the facilitation of the access to the “Final Price” and “CDS indices” for the exchange trading platforms.

Finally, we encountered further progress on Level 2 measures under the Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR).

To read more about these and other regulatory developments affecting the derivatives / securities markets, please see the news items below.

Sincerely yours,

Andres Prescher


EMIR clearing obligation for IRS and FRA published

The Delegated Regulation on the clearing obligation for certain interest rate swaps in non-G4 European currencies under the European Markets Infrastructure Regulation (EMIR) has been approved by the European Parliament and Council of the EU, and, subsequently, published on 20 July 2016 in the Official Journal of the European Union.

The classes subject to the clearing obligation are fixed-to-float interest rate swaps (IRS) and forward rate agreements (FRA) denominated in Norwegian Krone (NOK), Polish Zloty (PLN) and Swedish Krona (SEK).

The clearing obligation will take effect depending on the type of the counterparties (category 1 – 4) starting from 9 February 2017. The frontloading requirements will take effect from 9 October 2016 for both category 1 and 2 counterparties.

For more information please refer to our previous newsletter as well as the Delegated Regulation on the clearing obligation and the respective Corrigendum.


ESMA updated its EMIR Q&A

On 27 July 2016 the European Securities and Markets Authority (ESMA) issued an update of its Q&A on practical questions regarding the European Markets Infrastructure Regulation (EMIR).

The updated Q&A clarifies two issues: (i) reporting of trades cleared by a clearing house which is not a central counterparty (CCP) under EMIR, and (ii) identification of counterparties in an anonymized market.

In the first case, the entities concerned should not be identified in the “CCP ID” field of EMIR reports. In the case of trades executed in an anonymised market and cleared by a clearing house, the counterparty executing the transaction should request the trading venue of the clearing house that matches the counterparties to disclose the identity of the other counterparty before the reporting deadline.

For further information please refer to the EMIR Q&A as of 26 July 2016, TR Question 43.


Developments on the CDS market

Since 2011, the European Commission has been raising concerns as to the fairness of providing access to the credit derivatives market for exchange trading platforms. This relates in particular to the potential abuse of dominant positions by the International Swaps and Derivatives Association Inc. (ISDA) and Markit Group Ltd. (Markit) regarding respective ownership of intellectual property crucial for the credit default swaps (CDS) trading:

i. the “Final Price”, i.e. the price used to determine the payment between buyer and seller of a CDS contract upon the default of a debt obligation; ISDA claims proprietary rights over the “Final Price”; and

ii. CDS indices, i.e. the iTraxx and CDX index families which are the most liquid and most commonly referenced baskets of CDS contracts. They are market benchmarks and new exchange products cannot generate sufficient liquidity without reproducing the main characteristics of trading and clearing of these indices; Markit owns both iTraxx and CDX indices.

Access to the abovementioned Final Price and CDS indices is subject to the stringent licensing terms and conditions of ISDA and Markit respectively. After a certain number of license refusals, the European Commission started an official antitrust investigation with regard to the abuse of market positions.

In response to the European Commission’s competition concerns, ISDA and Markit decided voluntarily to facilitate their licensing arrangements. Based on their proposals, on 20 July 2016 the European Commission adopted decisions that render legally binding commitments to ISDA and Markit. The decisions ensure that all trading venues can benefit from fair, reasonable and non-discriminatory access to data and intellectual property of ISDA and Markit. This is deemed to enlarge the market for exchange-traded CDS as well as provide more transparency thereto.

For further information please refer to case number 39745 in the public case register of the European Commission.


Further progress on Level 2 measures under MiFID II

The European Commission has published another set of Regulatory Technical Standards (RTS) under the Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR).

In a nutshell, major parts of the published RTS stemmed from the Final Report of the European Securities and Markets Authority (ESMA) dated 19 December 2014. Those relate to:

  1. transparency requirements for trading venues and investment firms in respect of equity(RTS 1 with Annex);
  2. transparency requirements for trading venues and investment firms in respect of non-equity financial instruments(RTS 2 with Annex);
  3. organizational requirements of trading venues(RTS 7 with Annex);
  4. organizational requirements of investment firms engaged in algorithmic trading(RTS 6 with Annex);
  5. tick size regime for equity financial instruments(RTS 11 with Annex);
  6. transactions reporting to competent authorities(RTS 22 with Annex); and
  7. data standards / formats for financial instrument reference data(RTS 23 with Annex).

Apart from that, the European Commission released RTS on (i) authorization of investment firms, (ii) cooperation between competent authorities and (iii) registration of third country firms. Those stemmed from ESMA’s Final Report dated 29 June 2015.

The RTS published are subject to scrutiny by the European Parliament and the Council. Feedback is expected in autumn of this year.


FSB keeps reforming major interest rate benchmarks

The Financial Stability Board (FSB) published on 21 July 2016 a second interim progress report on implementation of its July 2014 recommendations to reform major interest rate benchmarks.

The major interest reference rates are widely used in the global financial system as benchmarks for a large volume and broad range of financial products and contracts. Uncertainty surrounding the integrity of these reference rates, attempted market manipulation and false reporting represented a potentially serious source of vulnerability and systemic risk. Against this background, the FSB undertook a fundamental review thereof and published in July 2014 the recommendations for reform developed by the Official Sector Steering Group (OSSG).

The 2016 interim progress report finds that administrators of major interbank offered rates (IBORs) have continued to take steps and the most progress has been made by the three major benchmarks of EURIBOR, TIBOR and LIBOR. These reference rates are of a systemic importance in Belgium, Japan and the United Kingdom. In addition, OSSG members showed good progress in identifying potential risk-free benchmark rates. Also in June, the Benchmarks Regulation was published, introducing a regulatory framework for benchmarks across the EU (see our previous Newsletter for more information).

Despite the substantial progress, the reforms of the IBORs have not been completed yet. Administrators should now focus on transition and decide how to anchor rates in transactions and objective market data as far as practicable. A final report is envisaged to be published in 2017.

For further information please refer to the FSB report.

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