31.07.2015 | KPMG Law Insights

Derivate – Insights – Derivatives | Edition No. 3/2015

Dear readers,

Derivatives are essential for a healthy economy. However, derivatives are also associated with considerable risks. The financial risks, caused by the Lehman Brothers insolvency, illustrated just now how dangerous derivatives can be for an economy.

Therefore, undertakings of real economies, banks and investors are now faced with new regulatory challenges e.g. EMIR and the upcoming SFTR. These challenges come along with the implementation of the new regulatory requirements and the optimization of a collateral management system.

Please find below the latest most relevant developments concerning derivatives.

Sincerely yours,

Andres Prescher


Compromise text on the regulation on securities financing transactions published

On 29 June 2015 the Council of the EU has published the final compromise text of the Regulation on Reporting and Transparency of Securities Financing Transactions (SFTR). An agreement on the text was reached with the European Parliament on 17 June 2015.

The SFTR introduces measures to improve transparency in three main areas:

  • the monitoring of the build-up of systemic risks in the financial system related to securities financing transactions;
  • the disclosure of information on such transactions to investors whose assets are employed in the transactions; and
  • reuse by banks or brokers for their own purposes of collateral provided by their clients.

Regarding the next steps of the SFTR, it will be, after finalized in all languages, submitted to the European Parliament for approval at first reading, and to the Council of the EU for adoption.

Please find here the press release and the final compromise text.


ESMA publishes responses received to Consultation Paper on clearing obligation

On 17 July 2015 the European Securities and Markets Authority (ESMA) published all comments received on its consultation paper on the clearing obligation under Article 4 of the European Market Infrastructure Regulation (EMIR). The consultation started on 11 May 2015. All interested parties were invited to submit their replies until 15 July 2015.

Please find here the published responses.


ESMA publishes 2014 annual report

The European Securities and Markets Authority (ESMA) has published on 15 June 2015 its annual report for 2014. The report includes comments on the achievements of its third year in existence.

Regarding derivatives, ESMA states that regulation has progressed and that ESMA is now moving on to operationalising the legislation laid down in the European Markets Infrastructure Regulation (EMIR). This year 15 central counterparties (CCPs) were authorised under the new EMIR requirements, including 10 CCPs clearing OTC derivatives, triggering the bottom up clearing obligation process which requires ESMA to determine the set of classes of over-the-counter (OTC) derivatives to be subject to the clearing obligation.

ESMA will continue to work on consistent application of EMIR and to promote common supervisory approaches and practices using various convergence tools. Furthermore, ESMA determines that as the overall regulatory framework transitions from policy making to implementation, it will need to reorientate its focus. ESMA sees an importance in developing the same effort that went into developing the policy, for the effective implementation of the policy.

Please find here the press release and the annual report 2014.


ESMA report proposes to include ETDs in EMIR´s interoperability arrangements for CCPs

On 2 July 2015 ESMA issued its final report on interoperability arrangements between EU-based clearing houses (central counterparties,CCPs) required under the European Markets Infrastructure Regulation (EMIR) and related Guidelines and Recommendations.

The report provides a mapping and a description of the current interoperability arrangements between EU CCPs for different product types i.e. EU equities, EU government bonds and EU Exchange-Traded Derivatives (ETDs.). In addition, it examines the reasons for extending the current EMIR framework to additional derivatives taking into account the corresponding costs and benefits to then conclude on the opportunity of such extension and its scope.

In its report, ESMA recommends to extend the EMIR provisions related to interoperability arrangements to Exchange-Traded Derivatives (ETDs). A further extension to over-the-counter (OTC) derivatives will be assessed later, if deemed appropriate.

Please find here the press release and the final report.


ESMA updates list of authorized list of CCP and Public Register – Eurex Clearing AG extends services

The European Securities and Markets Authority (ESMA) has on 13 July 2015 published an update of its list of central counterparties (CCPs) which are authorised under the European Markets Infrastructure Regulation (EMIR) and its public register for the clearing obligation.

Eurex Clearing AG was first authorised on 10 April 2014. The update concerns Eurex Clearing AG which was first authorized on 10 April 2014 and has now expanded its activities and services to the clearing of over-the-counter (OTC) inflation swaps.

Please find here the press release.


EBA launches second joint consultation on draft RTS on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP

The European Supervisory Authorities (ESAs) launched today a second consultation on draft Regulatory Technical Standards (RTS) outlining the framework of the European Markets Infrastructure Regulation (EMIR). This second consultation document is the result of an intense engagement with other authorities and the industry stakeholders in order to identify all the operation issues that may arise from the implementation of such framework.

The draft RTS on risk-mitigation techniques for over-the-counter (OTC) derivative contracts not cleared by a CCP are developed on the basis of Art. 11 (15) of EMIR, which establishes provisions aimed at increasing the safety and transparency of the OTC derivatives markets in the EU.

For those 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.

The consultation continued until 10 July 2015. All the responses on the first consultation paper were considered when developing this new version of the standards. A comprehensive feedback statement including industry stakeholders’ comments on the first and the second consultation paper will accompany the final draft RTS.

Please find here the press release and the consultation paper.


ISDA releases European Classification Letter

The International Swaps and Derivatives Association (ISDA) published on 14 July 2015 a new classification letter allowing trading firms to notify each other of their clearing and regulatory obligation under the European Markets Infrastructure Regulation (EMIR).

Under EMIR, financial and non-financial counterparties have to comply with certain regulatory obligations and the application of these obligations depends, in many circumstances, on the classification of both parties to a given transaction. The Classification Letter is a method of facilitating communication of classification status between counterparties to help ensure compliance with EMIR.

Please find here press realase and the Classification Letter.

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