On December 19, 2012, the European Commission (EC) adopted the technical standards (TS) for the regulation on over-the-counter (OTC) derivatives, central counterparties (CCPs) and trade repositories, commonly known as the European Markets Infrastructure Regulation (EMIR).
The level 1 text of EMIR came into force on August 16, 2012, and will now be supplemented by the newly adopted TS. The TS were initially proposed by the European Supervisory Authorities in September 2012, and the texts of the TS have now been adopted by the EC without amendment.
However, in a press release from the EC, it is stated that one TS, submitted by the European Securities and Markets Authority (ESMA), has not been endorsed. This particular TS relates to colleges of CCPs. There are concerns over the legality of this provision, therefore ESMA has been asked to redraft this provision. The redrafting is not expected to delay the coming into force of the obligations prescribed by the other TS. No date has been set for the publication of the redrafted provision.
The TS cover matters, including, inter alia: (i) the clearing of trades by financial, and in certain circumstances, non-financial counterparties, by central counterparties; (ii) the reporting of all trades that come within the scope of EMIR; and (iii) putting in place risk mitigation techniques for OTC derivatives contracts that are not cleared by CCPs.
By adopting the TS now, the EC has met the deadline set at the G20 summit in Pittsburgh in 2009. At the summit, it was agreed that global regulators would put in place legislation necessitating the mandatory clearing and reporting of transactions, in order to reform the derivatives market, which was, at the time, subject to very little regulation. EMIR, and its US equivalent, the Dodd-Frank Wall Street Reform and Consumer Protection Act, are intended to improve the transparency of the derivatives trading markets.
The TS are divided into two categories: regulatory TS and implementing TS. The former are subject to review by the European Parliament and Council, who will have a month from December 19, to review the provisions. The review period may be extended by a month, if necessary. The implementing TS are not subject to review by the European Parliament and Council. However, the implementing TS will not enter into force before the regulatory TS comes into force, since the two sets of standards complement each other, and are not stand-alone obligations. The TS will enter into force on the twentieth day following their publication in the Official Journal of the European Union.
Compliance with the provisions of EMIR by market participants may require, amongst others, the implementation of new IT systems, registration with a CCP and trade repository, and, for non-financial counterparties, an analysis of the trades that they undertake (as non-financial counterparties whose trading activities are below the thresholds prescribed in the TS will not be required to clear those trades). As these activities may take some time, market participants are encouraged to actively engage with the text of EMIR now, and ensure that their businesses are fully prepared when the obligations of EMIR come into full force and effect.