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23.12.2016 | KPMG Law Insights

Derivate – Insights – Derivatives | Edition No. 6/2016

Dear readers,

In our pre-Christmas edition we would like to present to you the latest news in the derivatives markets.

The Delegated Regulation on bilateral margining has recently been published in the Official Journal of the EU. In contrast, the central clearing obligation for financial counterparties (FCs) with a limited volume of activity might be postponed. The respective proposal from the European Securities and Markets Authority (ESMA) is now subject to endorsement by the European Commission (EC).

Furthermore, the EC published a general report on the European Markets Infrastructure Regulation (EMIR), where it addressed issues arising from the implementation and application of EMIR provisions.

It has been a true pleasure to inform you on the regulatory developments affecting the derivatives / securities markets in 2016. We wish you a merry Christmas and a successful year 2017. Happy holidays!

Sincerely yours,

Andres Prescher

EU

EMIR Delegated Regulation on bilateral margining published

The Commission Delegated Regulation (EU) 2016/2251 supplementing the European Markets Infrastructure Regulation (EMIR) has been published in the Official Journal of the European Union on 15 December 2016.

The European Commission’s draft of the Delegated Regulation was endorsed by the European Parliament and the Council without any material changes. However, with the publication in the Official Journal the final timeline for the implementation of bilateral margining requirements is now basically set as follows:

The requirements regarding initial margins will apply as follows:

  • above EUR 3 000 billion* – starting from 4 February 2017;
  • above EUR 2 250 billion* – starting from 1 September 2017;
  • above EUR 1 500 billion* – starting from 1 September 2018;
  • above EUR 750 billion* – starting from 1 September 2019; and
  • above EUR 8 billion* – starting from 1 September 2020.

The requirements regarding variation margins will apply as follows:

  •  above EUR 3 000 billion* – starting from 4 February 2017; and
  • all other counterparties – starting from 1 March 2017.

* aggregate average notional amount of non-centrally cleared derivatives (group-level)

Further information

Commission Delegated Regulation

ESMA

ESMA proposes to postpone central clearing for small FCs

The European Securities and Markets Authority (ESMA) published on 14 November 2016 its final report on the clearing obligation under the European Markets Infrastructure Regulation (EMIR) for financial counterparties (FCs) with a limited volume of activity, i.e. small FCs classified in Category 3.

The final report incorporates the feedback received to the consultation on the phase-in period for the clearing obligation for small FCs conducted by ESMA earlier this year (see our previous newsletter). Moreover, it describes the difficulties small FCs are facing in establishing the necessary clearing arrangements to meet their compliance deadline.

Based on the above, ESMA asked the European Commission to amend its Delegated Regulations on the clearing obligation by prolonging the phase-in period for small FCs by two years until 21 June 2019. The postponement shall apply to all categories of derivatives that are currently subject to the clearing obligation.

The European Commission shall decide within three months on the endorsement of the amendments proposed by ESMA (see Annex 3 to the Final Report).

Further information

ESMA’s Final Report

EC

EC published report on EMIR implementation

On 23 November 2016 the European Commission (EC) submitted a general report on the European Markets Infrastructure Regulation (EMIR) to the European Parliament and the Council. The report addresses issues arising from the implementation and application of EMIR provisions.

The most relevant shortcomings identified by the EC are:

  • absence of a mechanism to suspend the clearing obligation;
  • lack of transparency on margin standards and procyclicality requirements;
  • inefficient data aggregation by the trade repositories (TR);
  • inaccurate trade reporting;
  • legal challenges in providing access to third country authorities to TR’s data;
  • disproportionality of the costs and burdens in terms of frontloading and intragroup transactions;
  • excessive requirements for non-financial counterparties (NFCs) and small financial counterparties (small FCs); and
  • application of the clearing obligation to pension scheme arrangements.

Overall, the EC does not see a need for fundamental adjustments to be made to the nature of the core requirements under EMIR. It does, however, request action in respect of the issues identified.

The EC is going to propose a legislative review of EMIR in 2017. As part of this review the EC will also assess the relevant technical standards.

Further information

European Commission’s Report

EC

EC published RTS on application of position limits to commodity derivatives

The European Securities and Markets Authority (ESMA) published on 1 December 2016 the draft Regulatory Technical Standards (RTS) on the application of position limits to commodity derivatives. The RTS address the provisions of Article 57 of the revised Markets in Financial Instruments Directive (MiFID II).

In particular, the draft RTS set out the standard methodology to be used by competent authorities in order to calculate and apply position limits in a harmonized way across the market. They provide for a baseline limit and ways to adjust this limit based on seven factors for spot and other months’ physically settled and cash settled contracts.

The draft RTS also specify the application of the methodology: (i) how and when positions should be aggregated; (ii) when contracts should be considered the same; (iii) when OTC contracts should be considered economically equivalent, and (iv) when a commodity derivative position can be qualified as risk reducing.

The draft RTS are subject to further scrutiny until 1 March 2017 by the European Parliament and the Council.

Further information

RTS on position limits

ESMA

Stakeholders commented on the draft RTS under Benchmarks Regulation

Several stakeholders commented on draft Regulatory Technical Standards (RTS) under the Benchmarks Regulation published by the European Securities and Markets Authority (ESMA) on 29 September 2016 (see our previous newsletter), e.g.:

The Securities and Markets Stakeholder Group (SMSG) recommended ESMA to address the following:

  • to assess whether having two independent members of the oversight function is sufficient as regards the oversight function;
  • to define material changes to the benchmark’s methodology for the administrators in case of sudden market events in terms of transparency;
  • to reconsider whether all submitters shall demonstrate their competence on an annual basis, independently of the characteristics of the benchmarks;
  • to evaluate the possibility for non-significant benchmarks to cross-reference the methodology under Article 13 of the draft RTS for the purpose of its benchmark statements requirements;
  • to consider making pricing and price changes transparent, despite of lack of ESMA’s mandate on this subject-matter; and
  • the level of due diligence required from asset managers on index methodology should be consistent with the level of transparency of methodology benchmark administrators are required to provide.

The German Banking Industry Committee (Verbände der Deutschen Kreditwirtschaft, DK) commented on the Consultation Paper on the Benchmarks Regulation published by the European Securities and Markets Authority (ESMA) on 29 September 2016.

DK generally agrees with ESMA’s approach, however, with a number of reservations as follows (non-exhaustive list):

  • current oversight function requirements do not reflect the variety of governance structures across the industry;
  • vague definition of “input data”;
  • unclear “monitoring” obligation of input data for the administrator;
  • lack of clarification on the key elements of the benchmark’s methodology and what constitutes a secured algorithm; and

unclear criteria for the determination of a substantial exposure to benchmark related instruments for individual traders or trading desk.

Further information

Advice to ESMA from the SMSG

DK’s Reply Form for the Consultation Paper

BVI

BVI disagrees with ESMA’s approach on the trading obligation for derivatives under MiFIR

The German Investment Funds Association (Deutscher Fondsverband, BVI) provided comments to the Discussion Paper on the trading obligation for derivatives under the Markets in Financial Instruments Regulation (MiFIR) published earlier this year by the European Securities and Markets Authority (ESMA) (for details please see our previous newsletter).

BVI disagrees with the application dates for the trading obligation proposed by ESMA. It refers, in particular, to ESMA’s proposal on postponement of the clearing obligation for small financial counterparties (FCs) until 21 June 2019. BVI argues that such delayed clearing deadline appears to be beyond the envisaged trading obligation deadline for small FCs (3 January 2018 for interest-rate swaps in EUR, GBP, JPY, USD and 9 February 2018 for interest-rate swaps in NOK, PLN, SEK and credit default swaps).

According to BVI, ESMA shall align the phase-in approaches for both trading and clearing obligations. This would avoid an application of the trading obligation before the start of the clearing obligation.

Further information

BVI’s response to ESMA’s Discussion Paper

DE

BaFin intends to limit the marketing, distribution and sale of CFDs

On 8 December 2016, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) announced that it intends to limit the marketing, distribution and sale of financial contracts for difference (CFDs). In fact, BaFin follows a European trend: France, Belgium, Malta and Poland have already introduced restrictions on CFD retail products, while the UK is in the process.

According to BaFin, the distribution of CFDs with an additional payment obligation for retail clients raises significant concerns with regard to investor protection within the meaning of sec. 4b (2) no. 1a of the German Securities Trading Act (Wertpapierhandelsgesetz, WpHG).

In essence, the significant investor protection concerns result from the characteristics inherent to CFDs as products, i.e. unforeseeable risk of loss arising for the investor. The risk of loss encompasses not only the margin that the investor has provided, but potentially also his other assets.

Comments on the intended limitation shall be submitted to BaFin in writing by 20 January 2017.

Further information

Hearing on intended measure regarding CFDs

ESMA

ESMA recognised ICE Clear US Inc. as EMIR CCP

The European Securities and Markets Authority (ESMA) added ICE Clear US Inc. to its list of recognised third-country central counterparties (CCPs) under the European Markets Infrastructure Regulation (EMIR).

Further information

List of third-country CCPs recognised under EMIR

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