EMIR

European Commission Adopts Delegated Regulation Relating to EMIR Clearing Obligations for Certain Credit Derivative Contracts

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On March 1, the European Commission adopted a Delegated Regulation supplementing the European Union regulation on derivatives, central counterparties and trade repositories (“EMIR”).

EMIR requires mandatory clearing of certain over-the-counter (“OTC”) derivatives. The European Securities and Market Authority (ESMA) is required under EMIR to propose the classes of OTC derivatives that should be subject to clearing, as well as the different dates from which the clearing obligation will take effect for the different types of counterparties identified.

OTC derivative contracts concluded between the first authorisation of a central counterparty under EMIR and the later date on which the clearing obligation actually takes effect are also subject to clearing, unless they have a remaining maturity lower than the minimum remaining maturities which are to be laid down in the regulatory technical standards (Frontloading Requirement).

The Delegated Regulation determines the classes of the credit default swaps OTC derivative contracts that are subject to the clearing obligation and four different categories of counterparties for which different phase-in periods apply.

The Delegated Regulation also lays down the minimum remaining maturities for the purposes of the Frontloading Requirement as well as the dates on which the frontloading should start.  Delegated Regulation.

European Commission and U.S. CFTC Agree Common Approach on Requirements for Transatlantic CCPs

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On February 10, the European Commission published a statement setting out details of the common approach it has agreed with the U.S. Commodity Futures Trading Commission (CFTC) on requirements for transatlantic central counterparties (CCPs).

The statement explains that the agreement reached will ensure that EU CCPs will be able to do business in the U.S. more easily, and that U.S. CCPs can continue to provide services to EU companies. To implement the agreement:

  • The Commission intends to shortly propose for adoption an equivalence decision under the European Market Infrastructure Regulation (“EMIR”) with respect to CFTC requirements for U.S. CCPs. This will allow the European Securities and Markets Authority (“ESMA”) to recognize U.S. CCPs wanting to serve EU markets as soon as practicable. Once recognized, a U.S. CCP may continue to provide services in the EU while complying primarily with CFTC requirements. It will also become a qualifying CCP for the purposes of the Capital Requirements Regulation (Regulation 575/2013) (CRR), which will lower costs for EU banks and their subsidiaries.
  • The CFTC will propose a determination of comparability with respect to EU requirements. This will permit EU CCPs to provide services to U.S. clearing members and clients while complying primarily with certain corresponding EU requirements. The CFTC will also streamline the registration process for EU CCPs wishing to register with it.
  • The Commission will shortly propose the adoption of an equivalence decision to determine that U.S. trading venues are equivalent to regulated markets in the EU. This will provide a level playing field between EU and U.S. trading venues for the purposes of the Markets in Financial Instruments Directive (2004/39/EC) (MiFID).
  • The steps needed to implement the agreement will be put in place as soon as practicable, and the Commission will work with the CFTC to ensure that the changes are implemented in a co-ordinated manner. The Commission will also work with the CFTC to monitor the impacts resulting from the changes, and assess whether any further actions are necessary to ensure financial stability or prevent regulatory arbitrage.

Commenting on the agreement in a separate statement, ESMA advises that, once the Commission’s equivalence decision on the U.S. regime is adopted under EMIR, it will “rapidly” resume the recognition process of specific CFTC-supervised U.S. CCPs that had applied to it to be recognized in the EU. Although EMIR gives ESMA up to 180 working days to conclude the recognition process, ESMA intends to do everything it can to shorten the period, and will proceed with recognition as soon as the U.S. applicant CCPs meet the conditions contained in the equivalence decision. Given the June 21, 2016 deadline for the start of the EMIR clearing obligation in the EU, ESMA understands that U.S. CCPs will have a strong interest in becoming fully compliant with EU equivalence conditions, which should help to shorten the period.

ESMA and South African and Mexican Authorities to Cooperate Under EMIR on CCPs

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On 26 January 2016, ESMA announced that had entered into a memorandum of understanding (MoU) with each of the Mexican Comisión Nacional Bancaria y de Valores (CNBV) and the South African Financial Services Board (FSB) under the European Markets Infrastructure Regulation (EMIR).

EMIR provides for co-operation arrangements to be established by ESMA and non-EU authorities whose legal and supervisory framework for CCPs have been deemed equivalent to EMIR by the European Commission. The memoranda set out the terms on which the two authorities will cooperate and share information with ESMA regarding Central Counterparties (CCPs) which are authorised or recognized in Mexico or South Africa, and which have applied for EU recognition under EMIR. As well as establishing these arrangements, the MoUs provide ESMA with adequate tools to monitor the on-going compliance by the CCPs with the recognition conditions contained in EMIR. The MoU with FSB entered into force on 30 November 2015 and the MoU with the CNBV entered into force on 25 January 2016.  Press release. CNBV MoU. FSB MoU.

ESMA Reports to European Commission on Functioning of EMIR Framework

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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.

ISDA Publishes EMIR Classification Letter

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On July 13, 2015, ISDA published a classification letter that will enable counterparties to notify each other of their status for clearing and other regulatory requirements under Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and repositories (EMIR) (Classification Letter).

EMIR imposes a number of regulatory obligations on counterparties in the derivatives market. The application of the EMIR requirements depends on how counterparties are classified. The Classification Letter has been prepared as a bilateral version of the classification tools that currently exist on ISDA Amend and is intended to facilitate compliance with EMIR by allowing counterparties to communicate their status by answering a series of questions. ISDA has published an explanatory memorandum to accompany the Classification Letter.

The clearing categorization in the Classification Letter covers interest rate derivatives only. It is anticipated that the Classification Letter will be expanded in the future to cover other classes of products that may become subject to the clearing obligation.

ISDA Publishes Market Practice Guidance for Portfolio Compression Under EMIR

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On May 27, 2015, the International Swaps and Derivatives Association (ISDA) published market practice guidance on the portfolio compressions obligations under EMIR. The portfolio compression rules are part of the risk mitigation requirements for non-centrally cleared OTC derivatives under EMIR (Regulation 648/2012).

ESMA Publishes Consultation Paper on Clearing Obligation Under EMIR

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On May 11, 2015, the European Securities and Markets Authority (ESMA) published a fourth consultation paper (ESMA/2015/807) on the clearing obligation under EMIR (the Regulation on OTC derivative transactions, central counterparties and trade repositories (Regulation 648/2012)). The consultation paper provides clarifications on various aspects of the draft regulatory training standards that ESMA is required to draft and submit to the European Commission. Stakeholders are invited to provide comments on the consultation paper before July 15, 2015.

ESMA Publishes an Opinion on Draft RTS on Clearing of Interest Rate Swaps under EMIR

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Article 5(2) of Regulation (EU) No 648/2012 (EMIR) requires the European Securities and Markets Authority (ESMA) to develop draft regulatory technical standards specifying, inter alia, the class of OTC derivatives that should be subject to the clearing obligation, the date or dates from which the clearing obligation takes effect, including any phase in and the categories of counterparties to which the obligation applies.

In October 2014, ESMA submitted a draft regulatory technical standard (RTS) on the clearing obligation in respect of interest rate swaps to the European Commission. On 18 December 2014, the Commission submitted to ESMA a modified version of the RTS (the “modified RTS”) introducing, among others, (1) amendments to the date on which the frontloading obligation starts to apply and (2) a new provision on the treatment of non-EU intragroup transactions. In the modified RTS, the Commission proposed that for a period of maximum three years, any third country shall be deemed equivalent within the meaning of Article 13(2) of EMIR. The effect would be to allow, for a period of three years, financial counterparties to apply for the intra-group exemption in respect of their transactions with any third-country entity in the absence of decisions on equivalence.

On January 29, ESMA published an opinion on the modified RTS stating that ESMA considers that the Commission’s proposal in relation to non-EU intra group transactions is not appropriate from a legal perspective. ESMA noted that (i) the adoption by the Commission of implementing acts on equivalence under Article 13 is the only procedure envisaged under EMIR to establish whether third-countries can be considered as having legal, supervisory and enforcement frameworks equivalent to EMIR; and (ii)any provision that has an effect equivalent to that of an implementing act on equivalence under Article 13, although limited in time and scope, but without the examination procedure referred to in Article 13(2), may have unintended consequences and therefore requires a very careful review. ESMA will explore, in coordination with the Commission, a different manner to incorporate that provision.  Opinion.

ESMA Publishes Responses to Consultation on the Clearing Obligation Under EMIR

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On August 19, ESMA published a list of responses received in respect of its first consultation on the clearing obligation relating to draft regulatory technical standards (RTS) for the clearing of interest rate swaps under EU Regulation 648/2012 on OTC derivative transactions, central counterparties and trade repositories (EMIR).  The first consultation was published on July 11 and proposed that basis swaps, fixed-to-float interest rate swaps, forward rate agreements and overnight index swaps should be subject to central clearing.

ESMA will use the responses received to draft its final RTS which will then be subject to endorsement by the European Commission. Responses.