ESMA recommends changes to EMIR framework

EMIR requires the European Commission to submit a general report to the European Parliament and Council on how certain aspects of the EMIR framework have been functioning. ESMA has published four reports for the purpose of providing input to this report and providing recommendations for other amendments to EMIR.

Three of the reports are required under EMIR, and cover non-financial counterparties (NFCs), pro-cyclicality and the segregation and portability for CCPs. The fourth report includes recommendations on amending EMIR in relation to the clearing obligation, the recognition of third country CCPs and the supervision and enforcement procedures for trade repositories.

Non-financial counterparties (Report No.1)

ESMA’s review concluded that, while NFCs are active and significant players in the commodity and FX OTC derivatives market, their systemic relevance (when compared to financial counterparties) appeared to be limited. The review has demonstrated that these active market participants are not necessarily classified as NFCs above the clearing threshold (NFC+) because hedging is not counted when calculating clearing thresholds. ESMA has therefore proposed (a) a better and simpler identification of NFC and (b) an assessment of the systemic importance of NFCs irrespective of the hedging/non-hedging nature of their trades (so as to ensure that the entities that qualify as NFC+ are in the ones that have the most   systemic relevance).

Limiting pro-cyclicality (Report No.2)

ESMA recommends further specifying the rules for implementing the counter-cyclical tools adopted by CCPs for margins and collateral, including regular testing and transparency on the results to further improve their effectiveness.

Segregation and portability (Report No.3)

In order to promote convergent practices and achieve a level playing field, ESMA recommends introducing clarifications and more detailed requirements by Regulatory Technical Standards (RTS) along with incentives related to margin period of risk depending on the safety of the chosen account structure. ESMA also proposes monitoring the take-up of the different types of account models to confirm adequacy and efficiency.

Clearing obligation

ESMA proposes amending EMIR in order to streamline the process for determining clearing obligations and to introduce tools allowing the suspension of the clearing obligation when certain market conditions arise. It also proposes removing the frontloading requirement.

Recognition of third country CCPs

ESMA proposes that the jurisdiction decision be governed by RTS and that any recognition process should also include additional risk-based considerations allowing it to deny or suspend the recognition of a third country CCP.

Trade repositories (TRs)

ESMA proposes changes to its supervisory and enforcement powers and procedures including:

• Increases in fine levels
• Broadening the enforcement decisions available to it
• Appropriate timeframes to consider applications in the registration process
• Clarifying TRs’ obligations in relation to data quality and reconciliation and supervisory reporting

ESMA discussion paper on EMIR standards relating to CCP client accounts

On 27 August 2015, ESMA opened a Discussion Paper on the review of its RTS under EMIR which deal with client accounts of CCPs. The consultation is aimed at:

• CCPs
• Clearing members
• FCs and NFCs accessing CCP services as clients of clearing members

The consultation focuses on the provision in the RTS that deals with the definition of time horizons for the liquidation period and whether the difference in EU and US standards gives rise to the risk of regulatory arbitrage. ESMA is investigating whether it would be appropriate to revise the current RTS with respect to client accounts in order to allow CCPs authorised under EMIR to apply a one-day liquidation period for financial instruments other than OTC derivatives, only where margins on client accounts are calculated on a gross basis.      

ESMA is seeking stakeholder’s feedback until 30 September 2015.

European Commission adopts new rules on the clearing obligation for interest rate swaps

On 6 August 2015, the European Commission adopted new rules that make it mandatory for certain OTC interest rate derivative contracts to be cleared through central counterparties. The new rules take the form of a Delegated Regulation. It covers interest rate swaps denominated in euro, pounds sterling, Japanese yen or US dollars that have specific features, including the index used as a reference for the derivative, its maturity, and the notional type (i.e. the nominal or face amount that is used to calculate payments made on the derivative.

The classes of interest rate swaps are:

• Fixed-to-float interest rate swaps (IRS), known as ‘plain vanilla’ interest rate derivatives
• Float-to-float swaps, known as ‘basis swaps’
• Forward Rate Agreements
• Overnight Index Swaps

Contributed by Catharine Dwyer