On 29 May the European Commission held an open hearing on the review of EMIR at its premises in Brussels. The hearing was split into four sessions – covering CCPs; non-financial corporate counterparties; clearing and risk mitigation techniques; and trade repositories and reporting. The hearing was designed to give stakeholders the opportunity to flag areas where the EMIR regulation could be improved, made less burdensome and streamlined. Director General of DG FISMA Jonathan Faull stated that the report taking stock of the issues raised in the hearing and the consultation and outlining areas of improvement will likely be delayed until later in the year (rather than the August publication originally called for in EMIR itself).
Clearing obligations
In his opening speech at the hearing, Commissioner Hill, European Commissioner for financial stability, financial services and capital markets union, acknowledged that while not all aspects of the Regulation were yet in place, preparing for implementation had been a preoccupation for many in the industry for the past three years, so it was “a good time to take stock of that experience and see if there are lessons to be learned.”
He drew particular attention to clearing obligations and margin requirements for trades not centrally cleared. While nearly half of the $630 trillion in OTC derivatives was now cleared, “more needs to be done”. He announced the Commission has finalised its discussions with ESMA and the process has started of getting the first clearing obligations adopted by the Commission. “This means the first clearing rules for certain interest rate products might be in place as soon as April next year.”
Hill emphasised that non-financial end-users would have a three-year delay for implementation and that “we will soon put in place the necessary extension of the transitional relief for EU pension funds from central clearing. This will provide a further two years to look at possible solutions to the challenges that pension funds face when clearing.”
This topic was picked up elsewhere in the hearing, with the four sessions covering the following:
1) CCPs – discussions were moderated by ESMA Chair Steven Maijoor and focused on the functioning of CCP colleges; the necessity to allow the continued use of bank guarantees as collateral past the March 2016 deadline (especially for energy firms); the need to make more efficient the approval of new products; the unlevel playing field for CCPs with a banking licence; CCP access to central bank liquidity; and the need for more granular international standards to avoid inconsistent application of rules across jurisdictions.
2) Non-financial corporate counterparties – this session, chaired by Tom Springbett of the FCA, focused on how the regulation has impacted non-financial counterparties. Stakeholders were aligned on some of the biggest challenges facing these firms and urged the Commission in particular to look at the appropriateness of the definition of non-financial counterparty which was deemed too broad; whether the reporting requirements are proportionate on these firms (in particular the very smallest ones); and whether the definition of ‘derivative’ is clear across the EU. Director of ACER, Alberto Pototschnig urged that ESMA be given powers to issue legally binding guidelines (instead of relying on Q&As). The need to move from two-sided reporting to single-sided reporting was also widely supported by participants.
3) Clearing and risk mitigation techniques – this panel, chaired by the Commission’s Jennifer Robertson, explored the difficult some firms face in gaining access to clearing; the lack of indirect clearing currently being offered; the need for equivalence decisions to be adopted as soon as possible (not just CCP equivalence); and possible solutions for pension funds who currently benefit from an exemption from clearing.
FIA's Head of Europe, Simon Puleston Jones, who participated as a speaker on the panel, argued for a change to the Capital Requirements Regulation to allow a freeing up capacity banks have that would allow them to clear for more clients. In addition, he explained that indirect clearing should remain voluntary as currently there is no scalable offering by any clearing broker and advocated for a new model for indirect clearing, pursuant to which indirect clients could opt out of the right to receive “leapfrog” payments.
Puleston Jones also touched on the difficulties of pricing trades that will become cleared in the future due to the frontloading requirements; the need to default to an omnibus segregation model if clients fail to elect a preference in time; and the difficulties that persist due to disparate insolvency laws around the globe.
4) Trade repositories and reporting – the last panel, chaired by Jochem Kimman from the Dutch AFM, centred on a potential move to two-sided reporting over one-sided reporting (should industry continue to work on what is already there or move to a different system). The question over the need to report ETDs at all was raised by FIA Europe’s Simon Puleston Jones, as well as the need to improve on the UPI and UTI, which many agreed would already make a significant difference.
