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FIA comments on EMIR Review part 1 REFIT proposals

FIA comments on EMIR Review part 1 REFIT proposals

19 July 2017 11:15am EDT

On 18 July, FIA submitted a response to the European Market Infrastructure Regulation (EMIR) Part 1 (REFIT proposals). Many of the European Commission’s (Commission) proposed measures reflect FIA’s previous comments. As a result FIA’s response to Part 1 of the REFIT makes the following recommendations:

  • Reporting of exchange traded derivatives (ETDs).  FIA encourages the Commission to clarify:

-        will the clearing member-to-client trade still be reportable?

-        if it is still reportable, does the CCP have to report both the CCP-to-clearing member trade and the clearing member-to-client trade?

-        what, if any, are the ongoing obligations of the clearing member and/or client to check the accuracy of the data that has been reported on their behalf by the CCP?

-        do the reporting requirements apply to trades cleared through a third-country CCP?

  • Proposed amendments to Article 39 (bankruptcy remoteness provision).  FIA recommends that:

-the proposal be extended to address indirect clearing arrangements: direct clients providing indirect clearing services should also be required to hold client collateral on a bankruptcy remote basis and the proposals should clarify how clearing members (CMs) should treat the assets and positions of their clients in the event of a client default (when their direct clients are providing clearing services to indirect clients);

-the proposal should not cover the situation of a CCP default. CCP resilience, recovery and resolution should be solely addressed in a separate EU regulation[1];

-EU authorities obtain one or more independent, reasoned, external legal opinions confirming the legal effectiveness of the proposed drafting under EU and national insolvency laws - further consideration should also be given to existing national EU member state insolvency frameworks (e.g. UK’s Part VII of the Companies Act 1989, Articles L.440-7 to L.440-9 of the French code monétaire et financier, or Article 102b of the German Introductory Act to the Insolvency Statute).  FIA is concerned that, as drafted, the current proposals are not legally effective.

  • Proposed amendments to Article 4 (FRAND)

-In principle, FIA agrees with the objective of CMs offering clearing services on fair, reasonable and non-discriminatory terms (FRAND). 

-However, FRAND requirements will not of themselves promote better access to clearing –rather it is economic, commercial and risk considerations that restrict a potential client’s access to clearing.

-Further clarity is required:

  • on the interaction between FRAND under EMIR and other conflicting EU regulation such as MiFID II (that requires clearing services to be provided on “reasonable commercial terms” and for clearing members to “publish the conditions under which it offers clearing services”, etc.);
  • on the meaning of FRAND requirements, especially the words “non-discriminatory”; and
  • on the geographical (EU only?) and product scope (OTC derivatives clearing, but not exchange-traded derivatives) of the FRAND requirements;

-FRAND requirements should:

  • not result in a mandatory obligation on clearing brokers to offer a clearing service to all potential clients or on mandatory terms but should enable them to offer a clearing service in a competitive, commercial and prudent risk-mitigating manner; and
  • be set out at Level 1.
  • Suspension of the clearing obligation.  An effective, timely and transparent process is required and the consequences of suspension should be spelt out.
  • Removal of frontloading and backloading requirements.  FIA supports the removal of these requirements.
  • CCP transparency.  FIA welcomes the Commission’s proposal in relation to the CCP transparency requirements on their initial margin models and suggests a number of further enhancements – our response is aligned with ISDA’s on this topic and encourages further alignment with the new CPMI/IOSCO guidelines. CCPs should be mandatorily required to publish self-assessments against CMPI/IOSCO’s Principles for Financial Market Infrastructures (the PFMIs).
  • CCP investment criteria. FIA recommends that the Commission adds a new section 1a to Annex II of Commission Delegated Regulation (EU) No 153/2013 to permit CCPs to invest in certain money market funds, to align with equivalent US rules.
  • Non-Financial Counterparties

-FIA supports the proposal to retain a hedging exemption for NFCs.

-FIA supports the proposal that NFCs only have to clear the specific class(es) of OTC derivatives in respect of which they have exceeded the clearing threshold.

-Corresponding tweaks are required to the collateral requirements for uncleared OTC derivatives so that a NFC+ is only required to exchange collateral with respect to OTC derivatives in the same asset class(es) whose clearing threshold(s) that NFC+ has exceeded.

  • Financial Counterparties. FIA supports the positions of both ISDA and AIMA.
  • Portfolio Compression. FIA supports the position of ISDA.

The full response can be found here


[1] In November 2016, the Commission published a proposal for a regulation on CCP resilience, recovery and resolution which deals with CCP default, so any legal consequences in the event of the CCP default should be dealt with in that Regulation.

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