International Organization of Securities Commissions (IOSCO)

ESAs and IOSCO Publish Statements on Variation of Margin Exchange under EMIR

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On February 23, 2017, the Joint Committee of European Supervisory Authorities (“ESAs“) published a statement on variation margin exchange under the EMIR regulatory technical standards (“RTS“) on risk mitigation techniques for uncleared over-the-counter derivative contracts under Article 11(15) of the European Market Infrastructure Regulation (“EMIR“). The International Organization of Securities and Commissions (“IOSCO“) has also published a related statement.

The statement responds to industry requests relating to operational challenges in meeting the deadline of March 1, 2017, for exchanging variation margin, the effect of which will be experienced particularly by smaller counterparties.

Neither the ESAs nor competent authorities (“CAs“) have the power to disapply directly applicable EU legalization. As a result, any further delays of the application of the EU rules would formally need to be implemented through EU legislation, which the ESAs state is not possible due to the lengthy process for adopting EU legislation.

The ESAs outline their expectations of smaller counterparties as follows:

“The ESAs expect CAs to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation. This approach entails that CAs can take into account the size of the exposure to the counterparty plus its default risk, and that participants must document the steps taken toward full compliance and put in place alternative arrangements to ensure that the risk of non-compliance is contained, such as using existing Credit Support Annexes to exchange variation margins. This approach does not entail a general forbearance, but a case‑by‑case assessment from the CAs on the degree of compliance and progress. In any case, the ESAs and CAs expect that the difficulties will be solved in the coming few months and that transactions concluded on or after March 1, 2017, remain subject to the obligation to exchange variation margin.”

The statement points out that in 2015, the IOSCO had already granted a nine-month delay based on similar arguments from the industry. The ESAs comment that it is unfortunate that the financial industry has not prepared for the implementation. The ESAs had previously expressed concern about the delayed adoption of the then draft RTS.

In its statement, IOSCO explains that some market participants have faced difficulty in completing the necessary credit support documentation and operational processes to settle variation margin in accordance with the requirements. However, IOSCO expects all affected parties to make every effort to fulfill the necessary variation margin requirements by the deadlines. IOSCO adds that it believes that relevant IOSCO members should consider taking appropriate measures available to them to ensure fair and orderly markets during the introduction and application of such variation margin requirements.

The European Commission (EC) adopted Delegated Regulation 648/2012 supplementing EMIR with the RTS in October 2016. The Joint Committee of ESAs submitted the final draft RTS to the Commission in March 2016.

CPMI and IOSCO consult on Harmonization of First Batch of Key OTC Derivatives Data Elements

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On September 2, 2015, the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued a consultative report on the harmonization of the first batch of key OTC derivatives data elements (other than the unique transaction identifier (UTI) and the unique product identifier (UPI)).

The report focuses on a first batch of key data elements (other than UTI and UPI) that are considered important for consistent and meaningful aggregation on a global basis. The report provides information on the guiding principles adopted to develop the report and on the differentiation between first and second batch of data elements other than UTI and UPI. Also set out is the harmonization proposal in individual tables, data element per data element. The CPMI and IOSCO are working on a second batch of key data elements in parallel to this report.

CPMI and IOSCO Consult on Harmonizing Unique Transaction Identifier

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On August 19, 2015, the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued a consultative report on harmonization of the unique transaction identifier (UTI).

The report is the CPMI-IOSCO Harmonization Group’s initial response to its mandate from the Financial Stability Board (FSB) to address the harmonization of the UTI by producing guidance in this area. The group’s objective is to produce clear guidance as to the UTI definition, format and usage that meets the needs of UTI users, is global in scale, and is “jurisdiction agnostic”. This will enable the consistent global aggregation of over-the-counter (OTC) derivatives transaction data.

The key points considered in the report include:

  • The OTC derivatives transactions that should be assigned a UTI.
  • The entity or entities that should be responsible for generating UTIs in practice.
  • What the structure and format of a UTI should be.
  • The steps that would help to ensure that UTIs generated under the new guidance are distinct (to the extent necessary to achieve aggregation) from those UTIs generated under existing regimes.

The G20 leaders agreed in 2009 that OTC derivatives contracts should be reported to trade repositories (TRs) as part of their commitment to reform OTC derivatives markets by improving transparency, mitigating systemic risk and protecting against market abuse. Aggregation of the data reported across TRs is necessary to help ensure that authorities are able to obtain a comprehensive view of the OTC derivatives market and activity.

IOSCO Report on Post-Trade Transparency in Credit Default Swaps Market

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On August 10, 2015, the International Organization of Securities Commissions (IOSCO) published its final report on “post-trade transparency” in the credit default swaps (CDS) market (FR17/2015).

The term post-trade transparency refers to a regulatory system that mandates disclosure of information, widely accessible to the public, about the price and volume of each relevant transaction. The term does not refer to regulatory structures that allow for voluntary or selective disclosure of data.

The report analyses the potential impact of mandatory post-trade transparency in the CDS market. The analysis is based on a review of relevant works of international bodies and academic literature, an examination of publicly available transaction-level post-trade data about CDS, a survey of market participants and other market observers regarding their use of certain publicly available post-trade data and its perceived impact on the market.

IOSCO concludes that the data does not suggest that the introduction of mandatory post-trade transparency had a substantial effect on market risk exposure or market activity in the CDS market. In addition, IOSCO has identified certain potential benefits and costs to mandatory post-trade transparency, as set out in part VI of the report.

In the light of the potential costs and benefits, IOSCO believes that greater post-trade transparency in the CDS market, including making the price and volume of individual transactions publicly available, would be valuable to market participants and other market observers. Member jurisdictions are encouraged to take steps towards enhancing post-trade transparency in the CDS market in its jurisdiction. To assist, part VII of the report includes recommendations that IOSCO jurisdictions may wish to consider.

In an accompanying press release IOSCO notes that additional data from jurisdictions with mandatory post-trade transparency will enable further studies of the impact of post-trade transparency in the CDS market and other OTC derivatives markets.