EMIR Regulation

Reference Text: European regulation – 648/2012

Date of application: 16 August 2012

This text responds to the undertakings of the G20 (2009 Pittsburgh Summit) in order, by the end of 2012, to increase the transparency of the derivatives market and reduce the current risk induced by transactions which mostly remain dealt with privately(pure OTC – Over The Counter). It can be likened to the American Dodd Franck Act which dedicates part of the text (chapter VII) to the regulation of these transactions.

EMIR firstly introduces the “standard contracts” concept and associates them with an obligation for clearing via a Central Counterparty (CCP) with the aim of sharply reducing counterparty risk. The text then imposes an obligation to declare all OTC operations on derivatives, whether or not they relate to standard contracts, to central databases or “Trade Repositories”. Lastly, for transactions which are not cleared, as an exception or because they relate to non-standard contracts, the text sets out the reinforcement of the rules governing relations between parties, especially in regards to collateral exchange constraints between the parties.

The obligation made by EMIR to use a CCP reinforces the key role of these market infrastructures. It was therefore essential to ensure their solidity and guarantee their longevity. This is the purpose of the second part of the text. EMIR sets out a certain number of standards relative to their supervision, their governance and their organisation, but also to the levels of their capital corresponding to the type of risks they bear. The regulation also addresses the issue of settlement in central bank money, interoperability and access to data flows for trading platforms. Lastly, it establishes a “default waterfall” procedure relative to the ordered use of a CCP in the event of the default of one of its members and resources that are available, whether its own capital or the different types of guarantees (deposited by its members or subscribed with a specialised institution). This new procedure proves more protective for non-defaulting members.

The last part of the text is devoted to the regulation of Trade Repositories, the role of which will be to collect data on all transactions undertaken on OTC derivative products and to feed this information back to the competent authorities. It must be approved to exercise this activity, and failure to comply with the related obligations shall be sanctioned by the relevant supervisory authorities.

The desire to regulate operations now dealt with mainly Over The Counter which is at the origin of EMIR is extended in the proposed MIF regulation (MiFIR) which establishes the obligation to trade any contract deemed standard in the context of EMIR and having a sufficient level of liquidity via a trading platform (regulated market, MTF or OTF).

Current Situation

Following its adoption by the Council on 4 July 2012, the final text for EMIR was published in the Official Journal of the European Union on 27 July 2012. Its application date will therefore apply 20 days following its publication, 17 August 2012.

It will nevertheless only be able to be applied once the technical implementing measures have been specified (the level 2 measures) regarding the recognition procedure for CCPs, the classification of OTC derivatives, the definition of calculation rules for margin calls for the remaining OTC transactions. A delay regarding the definitive implementation has already been announced by the European Commission which should take place around mid-2013.

On the 27th September 2012, the final version of its Draft technical standards has been published by ESMA. Except two of them (on third country and on margin requirements for non-centrally cleared derivatives), standards have been adopted by the Commission on the 19th of December.

20 December 2012: Consultation by ESMA on guidelines for establishing consistent, efficient and effective assessments of interoperability arrangements (answers expected for the 31 January).

8 December 2012: Q&A issued by the Commission.

Since neither the Parliament nor the Council have made objection before the end of the scrutiny period of two months (they obtained an extension of one month and thus had until the 19 February to object), technical standards have been published in the JO of the EU on the 23rd of February and entry into force on the 15th of March.

15th of March 2013 is the first day for some of the requirements regarding risk mitigation techniques for non cleared contracts like timely confirmation (all parties are concerned) as well as valuation (for financial counterparties and non financial ones when above the thresholds – NFC+). Non financial counterparties are also required as of the 15th of March to declare them as NFC+. This is also the start of the period for Trade Repositories and CCPs to send their application form to their authorities.

Clearing obligation may start according to AMF around mid 2014 following a phase-in approach (financial counterparties and non financial ones).

15th of March: new version of the ESMA’s draft technical standards on CCP colleges (the previous one was rejected by the Commission last December)

20th of March 2013: ESMA issues its Q&A

Next Steps

ESA (ESMA, ABA, EIOPA) consultation on certain technical standards regarding techniques for reducing risk in certain operations which continue to be processed bilaterally. This should be issued during the second semester 2012 in order to ensure that the technical standards themselves are finalised by the end of 2012. This delay is a result of ESA’s desire to define standards that are in line with the principals that are being drafted in this area on a global level by CPSS –IOSCO.
One should note that a new version of the BCBS IOSCO consultation has been issued in February (answers expected at last on the 15th of March).
According to the AMF, news should be expected from the ESAs in September 2013.