On May 4, the European Commission published a legislative text proposing changes to the European Market Infrastructure Regulation. The proposed changes, if approved, would ease certain requirements related to derivatives clearing and transaction reporting and reduce costs and regulatory burdens for market participants.
Valdis Dombrovskis, the commissioner in charge of financial services policy, emphasized that the majority of the changes come as a result of the Commission’s call for evidence, which sought views from the industry on where post-crisis legislation could be amended to streamline existing provisions and reduce unintended consequences.
“The European Market Infrastructure Regulation is at the heart of the EU’s financial reforms,” Dombrovskis said. “Today’s proposal ensures that EMIR achieves its objective of reducing systemic risk in the OTC derivatives market, while keeping costs to a minimum for the real economy. The proposal builds on the Commission’s call for evidence and deepens our capital markets and our efforts to support investment, growth and jobs.” Key elements of the May 4 legislative proposal include the following:
- Streamlined reporting of exchange-traded derivatives: Under EMIR, transactions in exchange-traded derivatives must be reported by both sides of the transaction. The proposal introduces single-sided reporting for exchange-traded derivatives and assigns the reporting responsibility to clearinghouses. The Commission said this will “greatly simplify” the reporting process without adversely impacting transparency.
- Removal of frontloading and backloading requirements: The proposal would remove the obligation to report historic data on OTC derivatives trades, known as “backloading.” The Commission believes that this will significantly reduce costs and burdens on counterparties and result only in a very limited loss of data compared to the current rules. In addition, the frontloading requirement also would be removed. Under the current rules, long-dated trades must be reported as soon as they become subject to mandatory clearing requirements, even if the clearing obligation has not taken effect.
- Intra-group exemption: Intragroup transactions involving non-financial counterparties would be exempted from the reporting obligation. The Commission said this would significantly reduce the costs and burdens of reporting for these counterparties without significantly affecting the ability of regulators to monitor systemic risk in the OTC derivative markets.
- Temporary suspension of the clearing obligation: The proposal would give the Commission the power to temporarily suspend any clearing obligation on the basis of a request from the European Securities and Markets Authority. The Commission explained that this power is needed if the clearing obligation becomes impossible to continue or has adverse effects for financial stability. The Commission also noted that this new provision complements the proposed framework for the recovery and resolution of central counterparties by introducing the mechanism for a temporary suspension of clearing obligation in situations other than resolution.
- CCP transparency: The proposal would require central counterparties to provide their members with tools allowing them to simulate the amount of collateral requested to clear future trades. In addition, CCPs would be required to make available a thorough description of their initial margin models to their clearing members for them to gain a clear understanding of their reach and their limitations.
- Clearing obligation for non-financial counterparties: Contracts by non-financial firms above a clearing threshold will continue to have to be cleared through a CCP. However, the proposed amendments would allow firms to only clear those classes of derivatives which breach the clearing threshold. In addition, only non-hedging contracts would be counted towards thresholds triggering the clearing obligation.
- Clearing obligation for pension funds: The proposal would extend by three years the temporary exemption from the clearing obligation of pension scheme arrangements. Clearing obligation for small financial counterparties: The proposal would establish a clearing threshold for small financial counterparties based on the volume of their OTC derivatives transactions. Only counterparties exceeding that threshold would be required to clear their trades.
