We examine the European Commission’s proposed reforms to EMIR and what asset managers can expect.
Four years since the extensive overhaul of the derivatives market and we have finally emerged with significant obligations for OTC (over-the counter) derivatives. EMIR (European Markets Infrastructure Regulation) was the EU’s regulatory response to the subprime-mortgage crisis and designed to increase transparency and reduce risks associated with OTC derivatives. EMIR came into force in 2012, requiring central clearing for all eligible OTC derivatives, reporting of all exchange-traded and OTC derivatives to a trade repository, and the adoption of risk-mitigation standards for non-centrally cleared derivatives.
Hindsight is a Beautiful Thing
The practical realities of effecting change needs time to be digested. The implementation of these rules has been challenging for the industry.
Asset managers have had to analyse their derivatives portfolios to determine which rules are applicable to OTC versus exchange-traded contracts; decipher exemptions applicable to certain classifications of counterparty and intra-group transactions; and work through the divergent opinions on which instruments are in scope for EMIR. Equally, collateral management has moved centre stage with renewed focus on the management of mandatory margin requirements which require careful assessment of their eligible collateral inventory.
Another challenge has been that the EU EMIR requirements do not exactly align with the US Dodd-Frank OTC provisions. This has created regulatory fragmentation for global asset managers trading OTC under both rule sets.
Changes are Coming
It has been made clear from the consultation that some requirements of EMIR need to be adjusted in order to be practically implemented by the industry. Areas highlighted within the industry consultation requiring enhancements include:
- the intrinsic value of reporting certain historic data
- uncertainty around the entities that EMIR intended to capture
- mandated clearing for pension scheme arrangements
- lack of transparency from regulators on data reported to trade repositories
- disproportionate impact of EMIR on small financial counterparties
In response to the industry’s consultation the EC has proposed an amendment to simplify the obligations. While the basic tenets of EMIR– market transparency and the mollification of systemic risk– will never be compromised, the following reforms have been proposed:
- Removal of reporting requirement for historic trades Trades entered before 12 February 2012 will no longer need to be reported.
- NFCs part of intragroup transactions are exempt NFCs, smaller counterparties, and certain pension schemes may avail themselves of OTC clearing exemptions.
- Simplification of the reporting process Single-sided reporting by central counterparties has been proposed for exchange-traded derivatives. The financial counterparty to a trade against a non-financial counterparty under the clearing threshold, will be charged with the responsibility and liability for reporting the trades each time it faces such a counterparty.
- Increased infringement fines Regulatory infringement fines are being raised to urge trade repositories to have greater focus on the quality of data they maintain.
With global regulatory harmonisation on the agendas of many regulators, the current proposal seeks to align with other existing rules to ensure a consistent and proportionate application of the derivatives market reforms.
There is an expectation that the EC’s proposed reforms will benefit entities currently subject to EMIR rules. Before being implemented however, the proposal still needs to be endorsed by the EU Parliament and Council and the corresponding technical standards will need to be updated. We expect certain provisions will be deferred and become applicable in stages. The first amendments likely won’t take effect until the end of 2018. Asset managers will want to follow the lifecycle of these proposals to ease the cost and burden of reporting historic data when they do eventually come to fruition.
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