Third Country CCPs

On 12 March 2013, ESMA published practical guidance for the recognition of Third Country Central Counterparties (“CCPs”) under EMIR which sets out ESMA’s recognition process and offers practical guidance for applicants. Under EMIR, ESMA may only recognise a Third Country CCP where certain conditions have been satisfied. Additionally, Third Country CCPs which are already recognised to provide clearing services in the EU in accordance with the national law of an EU Member State are required to apply for recognition by 15 September 2013. The guidance covers communication with ESMA to apply for recognition, timeframes for submission of applications and the assessment criteria.

Entry into force of RTS

From 15 March 2013, the regulatory technical standards (“RTS”) endorsed by the European Commission in December 2012, set out below, entered into force. Their provisions are binding on all EU Member States without the requirement for national implementation.

They relate to:

• Minimum details of the data to be reported to trade repositories
• Details of the application for registration as a trade repository
• Data to be published and made available by trade repositories and operational standards for aggregating, comparing and accessing the data
• Capital requirements for CCPs
• Requirements for CCPs (except for the requirement that bank guarantees are fully backed by collateral (which will apply from 15 March 2016))
• Indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, risk mitigation techniques for OTC derivatives contracts not cleared by a CCP (except for Portfolio Reconciliation, Portfolio Compression and Dispute Resolution provisions (which apply from 15 September 2013)) 

Q&A

On 20 March 2013 ESMA issued a Q&A on EMIR, which supplements the European Commission’s FAQ on EMIR. The Q&A will be updated and expanded as and when appropriate and, at present, deals with three areas, OTC derivatives, CCPs and Trade Repositories.

The Q&A, while designed to promote common supervisory approaches and practices amongst national competent authorities in the application of EMIR, also serves to provide guidance to market participants. The Q&A confirms that:

• Derivative contracts traded on a Multilateral Trading Facility are considered OTC derivatives for EMIR purposes.
• From 15 March 2013, non-financial counterparties (“NFCs”) should calculate whether or not they exceed the clearing threshold (and notify both ESMA and their national competent authority on the first day that their rolling average position over 30 working days does so).
• As financial counterparties (“FCs”) are not responsible for assessing whether the counterparty with whom it trades is a NFC above or below the clearing threshold, NFCs are required to determine their own status against the clearing threshold. This means that FCs are entitled to rely on a counterparty’s representation as to its EMIR status unless it has information which “clearly demonstrates” that those representations are incorrect.
• To comply with the “timely confirmation” requirements of EMIR, counterparties must reach a legally binding agreement with respect to all the terms of an OTC derivative contract.
• CCPs must record client assets posted as margin, default fund contributions or contributions to other financial resources as pre-haircut valuations, thereby ensuring transparency in the recording of client assets.
• Exchange traded derivatives on government bonds and cross currency swaps are confirmed as being classified as interest rate products.
• While both CCPs and counterparties are required to report they must agree on an efficient reporting method to avoid duplication. Neither the CCP nor the counterparty has the right to impose a particular reporting mechanism on the other in situations where a different trade repository is used by each entity.

International treatment of central banks and public entities managing public debt with regard to OTC derivatives transactions

On 22 March 2013, the Commission published a report on the “International Treatment of Central Banks and Public Entities Managing Public Debt with regard to OTC Derivatives”.

While, under EMIR, EU central banks and bodies responsible for the management of public debt were exempted from EMIR, uncertainty remained in relation to the treatment of non-EU central banks. The report is the first step towards exempting certain third countries’ central banks and public debt management offices from the scope of EMIR.

The Commission concluded that the central banks and bodies responsible for the management of public debt of both Japan and the US should be exempted as both jurisdictions have finalised rules on OTC derivatives. Therefore, a delegated act will be required to amend Article 1(4) of EMIR to facilitate this. However, as similar rules in Australia, Canada, Hong Kong, Switzerland and other jurisdictions have not been finalised, the Commission will, once relevant rules have been introduced, determine whether an extension to the list of exempted bodies is appropriate.

The Commission was of the view that adding foreign central banks to the list of exempted entities under EMIR would prevent interference with the conduct of those countries’ monetary responsibilities and promote a level playing field in the application of OTC derivatives reforms with regard to transactions with central banks across these jurisdictions, as far as the central clearing and reporting obligations are concerned.

Contributed by Catharine Dwyer