ESMA Reports to European Commission on Functioning of EMIR Framework

On August 13, 2015, the European Securities and Markets Authority (ESMA) published four reports on how the EMIR (the Regulation on over the counter derivative transactions, central counterparties and trade repositories) (Regulation 648/2012)) framework has been functioning and providing input to the European Commission’s EMIR review.

The first three reports set out below are required under Article 85(1) of EMIR and the fourth responds to the Commission’s EMIR review.

1)    Review of the use of over-the-counter (OTC) derivatives by non-financial counterparties (ESMA/2015/1251)

This report provides an overview of non-financial counterparties (NFCs) and issues relating to their classification, together with an analysis of the systemic importance of transactions carried out by NFCs in OTC derivatives markets. ESMA concludes that, when compared to financial counterparties, the systemic relevance of NFCs appears limited, although they are significant players in the commodity OTC derivatives market and to a lesser extent in the foreign exchange OTC derivatives market. ESMA’s main proposals relate to a better and simpler identification of NFCs and a simplification of the framework applicable to NFCs. This would be achieved, for example, by removing the hedging criteria when assessing the systemic importance of NFCs to ensure that the entities that come above the clearing threshold are the ones which actually pose the most significant risks to the system. ESMA believes its proposals will greatly simplify the process and reduce the compliance costs for the majority of small and medium NFCs, which pose limited systemic risk.

2)    Review of the efficiency of margining requirements to limit pro-cyclicality (ESMA/2015/1252)

This report analyses the relevant regulatory provisions and discusses their efficiency in limiting pro-cyclical effects on margin requirements and collateral used to cover margin requirements. ESMA recommends further specifying the rules for implementing the counter-cyclical tools adopted by central counterparties (CCPs) for margins and collateral, including regular testing and transparent results.

3)    Review of the segregation and portability requirements (ESMA/2015/1253)

This report relates to the application of the segregation requirements set out in Article 39 of EMIR. It summarises the provisions relating to segregation and portability and provides a recap of the establishment and evolution of CCPs in the EU during EMIR implementation. ESMA suggests that clarifications and more granular requirements on segregation and portability could be introduced by regulatory technical standards. It also proposes to monitor the implementation of different types of account models to assess and ensure that the expected benefits materialise and to track undue constraints. Finally, the report addresses the evolution of CCPs’ policies on collateral margining and securing requirements and their adaptation to the specific activities and risk profiles of their users.

4)    ESMA input as part of the Commission consultation on the EMIR review (ESMA/2015/1254)

This report provides input to assist the Commission in its review beyond the three reports required under Article 85(1) of EMIR. Among other things, the report:

  • flags issues relating to scope and definitions, and addresses in particular the case of municipalities and regional governments;
  • describes the rigidity of the clearing obligation procedure and consequences of its lack of flexibility, indicating changes to improve it;
  • raises issues with intragroup exemptions and the need for more clarity;
  • raises concerns about the trade reporting requirements and makes a number of proposals, including how to adapt better the process to the variety of counterparties that need to report;
  • flags the limitations of the recognition process for third-country CCPs; and
  • suggests some amendments to address issues relating to the requirements for trade repositories.