OTC derivatives

Financial Services Trade Associations Urge HM Treasury to Recognize EEA Derivatives Trading Venues in Event of No-deal Brexit

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A number of key UK, EU and international financial services trade associations published a letter (dated April 5) to HM Treasury on the equivalence of European Economic Area (EEA) derivatives trading venues under the EU retained versions of European Market Infrastructure Regulation (EMIR) (648/2012) (UK EMIR) and the Markets in Financial Instruments Regulation (600/2014) (UK MiFIR) if there is a no-deal Brexit.

The trade associations highlight the disruptive impact on UK market participants and European derivatives markets arising from the absence of HM Treasury equivalence determinations:

  • Under Article 28(4) of UK MiFIR with respect to EEA multilateral trading facilities (MTFs) and organized trading facilities (OTFs). This will mean that UK financial counterparties (FCs) and UK non-financial counterparties (NFCs) over the clearing threshold would cease to be able to execute transactions in over-the-counter (OTC) derivatives subject to the trading obligation under UK MiFIR on those venues in a no-deal Brexit.
  • Under Article 2a of UK EMIR with respect to EEA regulated markets. This will mean that EEA exchange-traded derivatives (EEA ETDs) are considered OTC derivatives under UK EMIR in a no-deal Brexit.

The trade associations urge HM Treasury to prepare the necessary measures to recognise the equivalence of EEA derivative trading venues under UK EMIR and UK MiFIR, with a view to those measures taking effect on or very shortly after a no-deal Brexit. They suggest that HM Treasury could make an equivalence direction under the Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019 (SI 2019/541) or, alternatively, the FCA could grant transitional relief for this purpose using its temporary transitional powers under Part 7 of the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019 (SI 2019/632). They urge HM Treasury and the FCA to indicate the approach that they intend to take as soon as possible.

 

European Commission to Publish Legislative Proposal to Revise the Regulation on OTC Derivatives, Central Counterparties and Trade Repositories (“EMIR”)

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On January 31, 2017, the European Commission published a speech by Valdis Dombrovskis, Commission Vice President, on finance for growth in manufacturing.

The speech included the Commission’s recent review of EMIR, the outcome of which the European Commission reported on in November 2016.

Mr. Dombrovskis commented that, during the review process, the European Commission received substantial feedback on the rules governing derivatives. Several respondents, including regulators and industry participants, argued that there is scope to make the rules and reporting obligations in this area more proportionate, particularly for non-financial counterparties.

The European Commission agrees with this feedback and intends to address some of the issues by revising existing technical standards to make reporting standards simpler and clearer. It will publish its legislative proposal to revise EMIR in spring 2017.

European Commission Adopts Delegated Regulation on RTS on Risk Mitigation Techniques for Uncleared OTC Derivative Contracts under EMIR

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On October 4, 2016, the European Commission adopted a Delegated Regulation supplementing EMIR (the Regulation on OTC derivatives, CCPs and trade repositories) (Regulation 648/2012) with regulatory technical standards (“RTS”) on risk mitigation techniques for uncleared OTC derivative contracts, together with related Annexes (C(2016) 6329 final).

The Delegate Regulation sets out the levels and types of collateral that OTC derivatives counterparties must exchange bilaterally if the transaction is not cleared through a central counterparty (“CCP”). In the event that one counterparty to the transaction defaults, the margin collected will protect the non-defaulting counterparty against resulting losses.

The Joint Committee of the European Supervisory Authorities (ESAs) submitted the final draft RTS to the Commission in March 2016. In July 2016, the Commission informed the European Banking Authority that it intended to endorse the draft RTS with some amendments, including in relation to the concentration limits for pension scheme arrangements and the timeline for.

The Council of the EU and the European Parliament will now consider the Delegated Regulation. If neither of them objects to it, the Delegated Regulation will enter into force 20 days after its publication in the Official Journal of the EU.

European Commission Addendum to Draft RTS on Margin Requirements for Uncleared OTC Derivatives under EMIR

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On August 2, 2016, the European Commission published an addendum to the draft regulatory technical standards (RTS) on margin requirements for uncleared OTC derivatives under Article 11(15) of the European Market Infrastructure Regulation (EMIR).  This follows an endorsement by the European Commission on July 28, 2016 of the draft RTS with amendments.  The ESAs will have 6 weeks to respond to these amendments before resubmitting them to the Commission in the form of a formal opinion.

In the addendum, the Commission states that there are some clarifications to be made to the revised draft RTS on margins in Articles 34 and 36 on application timing and in Annex III where a formula is missing. The intention of the Commission is to have the first wave of the initial margin requirements applied from the date one month after the date the RTS enter into force. This was the intention of paragraph 1 in Article 36. However, the Commission considers that the reading of the interaction of paragraph 1 with the other paragraphs in Article 36 is not clear and that the revisions set out in the addendum are therefore necessary.

ESAs Publish Final Draft Technical Standards on Margin Requirements for Non-Centrally Cleared Derivatives

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The Joint Committee of the European Supervisory Authorities (EBA, EIOPA, ESMA) (“ESAs“) has published final draft Regulatory Technical Standards (“RTS“) outlining the framework of the European Market Infrastructure Regulation (EMIR). The RTS cover the risk mitigation techniques related to the exchange of collateral to cover exposures arising from non-centrally cleared OTC derivatives. They also specify the criteria concerning intragroup exemptions and the definitions of practical and legal impediments to the prompt transfer of funds between counterparties.

The draft RTS prescribe that, for OTC derivatives not cleared by a Central Counterparty, counterparties have to exchange both initial and variation margins. This will reduce counterparty credit risk, mitigate any potential systemic risk and ensure alignment with international standards. The draft RTS outline the list of eligible collateral for the exchange of margins, the criteria to ensure the collateral is sufficiently diversified and not subject to wrong-way risk, as well as the methods to determine appropriate collateral haircuts. The draft RTS also lay down the operational procedures relating to documentation, legal assessments of the enforceability of the agreements and the timing of the collateral exchange, as well as the procedures for counterparties and competent authorities related to the treatment of intragroup derivative contracts.

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.

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.

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.

IOSCO Publishes Consultation Paper on Risk Mitigation Standards for Non-Centrally Cleared OTC Derivatives

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On September 17, the IOSCO published a consultation paper on risk mitigation standards for non-centrally cleared OTC derivatives (CR06/2014).

The standards have been developed in consultation with the Basel Committee on Banking Supervision and the Committee on Payments and Market Infrastructures and propose nine standards whose objectives are to increase financial stability, facilitate the management of counterparty credit and other risks and promote legal certainty.

Comments are invited before the closing of the consultation on October 17.  Consultation.