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Transatlantic Derivatives Consensus: Landmark Step for EC/US Cooperation

by Simone Goligorsky and David McDonnell

On 11 July 2013, the European Commission (EC) and the United States Commodity Futures Trading Commission (CFTC) announced a high-level joint understanding, known as the “Path Forward”, which details the shared future vision on the cross-border regulation of over-the-counter (OTC) derivatives (click here for the full announcement). This is a welcome announcement, given the concerns that many market participants had regarding the possibility of certain derivative transactions being subject to regulation on both sides of the Atlantic. The Path Forward has been produced as part of the package that was developed in order to promote the transparency of OTC derivatives markets and to lower the risks associated with them. 

At the core of the Path Forward is the objective of avoiding what was viewed by some market participants as the ‘double treatment’ of derivatives, whereby the derivatives would have been subject to the simultaneous application of both European and US legislative requirements, potentially leading to inconsistency, conflicts of law, and legal uncertainty. Considering the level of similarity between the European and US regimes, the EC and CFTC have agreed that such a duplicative approach may be, to the greatest extent possible, avoided. 

Instead, the EC and CFTC will, where appropriate, defer to the regulatory requirements in either Europe or the United States, as applicable. For example, under the European Market Infrastructure Regulation (EMIR), the EC has adopted risk mitigation rules that have a high-degree of similarity to the CFTC’s business conduct standards. Important action has been taken on bilateral, uncleared swaps, so that the regulatory rules in both jurisdictions will be viewed as comparable and as comprehensive as one another. The net result is that market participants are likely to now benefit from these equivalence rules.

In addition to the progress made to date, the EC, CFTC, and the European Securities and Markets Authority (ESMA) will continue to work together, and with other global regulators, on the harmonisation of international rules on posted margins for uncleared swaps, with a view to implementing a uniform system across as many jurisdictions as possible. 

It is worth noting that while the Path Forward heralds a significant step for enhanced cross-border regulation, market stability, and confidence, it was relatively light on concrete details. As such, market participants subject to European regulations, as well as US counterparties governed by Dodd-Frank, should continue to monitor collaboration between both regulatory authorities closely.


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European Commission Adopts EMIR Technical Standards

by Simone Goligorsky

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 [...]

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EMIR Enters into Force

by Prajakt Samant and Simone Goligorsky

On August 16, 2012, the European Market Infrastructure Regulation (EMIR) came into force, 20 days after the final text was published in the Official Journal of the European Union.  The Level 1 text will be supplemented with technical standards, which are due to be published later this year, and expected to come into force next year.  It is the technical standards that will define who exactly will be affected by EMIR, and how. 

The European Securities and Markets Association (ESMA) has also published the responses that it received from market participants to the June 2012 consultation on the draft technical standards.  Responses were received from, inter alia, asset managers, banks, government regulatory and enforcement bodies, insurance and pension funds, investment services, issuers, and regulated markets, exchanges and trading systems.

These responses will be taken into account when ESMA submits its proposals on the technical standards to the European Commission (the Commission) by September 30, 2012.  Following this submission, the Commission will have three months during which it must adopt the final technical standards.  The technical standards will cover matters including:

  • The threshold that non-financial counterparties will have to cross before their trades have to be cleared;

  • The exemptions for intragroup transfers;

  • The data to be reported regarding each trade; and

  • Data that will have to be provided by trade repositories to the relevant authorities and regulators. 

 The various provisions of EMIR are due to come into force at different times.  For example, the first clearing obligations are expected to be imposed from summer 2013.  Derivative contracts are expected to have to be reported from July 1, 2013.  By the end of December 2014, ESMA is expected to submit reports to the Commission on the functioning of EMIR.

With the final text of EMIR edging closer to completion, market participants are advised to ensure that they have the requisite systems in place, to guarantee that their trading activities are fully compliant with the requirements of EMIR.  

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ACER and ESMA Publish Respective Consultations on REMIT and EMIR

by Prajakt Samant and Simone Goligorsky

In the last two weeks, both the Agency for the Cooperation of Energy Regulations (ACER) and the European Securities and Markets Authority (ESMA) have published consultations for market participants on the Regulation on wholesale energy market integrity and transparency (REMIT) and the European Market Infrastructure Regulation (EMIR), respectively.  This article considers some of the issues that have been raised by both consultation papers and outlines the areas where the input of markets participants has been sought.

To read the full article, click here.

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Trialogue Discussions Lead to Agreement on Final Text of EMIR

by Prajakt Samant

On February 9, 2012, following a series of trialogue discussions between the European Commission (EC), the European Parliament (EP) and the Council of Ministers (CM), the final text for the European Market Infrastructure Regulation (EMIR) was agreed.  The agreed text will now be voted on by the EP and the CM, although these votes are unlikely to lead to any changes of the text.  The final text of EMIR has not yet been published, but this is due to be circulated in the coming days. 

The agreement follows several weeks of trialogue discussions and non-agreement on several points in the regulation, particularly on issues concerning central counterparties, frontloading of contracts and intragroup transactions. Had an agreement not been reached by mid-February, it was likely that the text would have been subject to a second reading, leading to further delays in the publication of the final text.

The European Securities and Markets Authority (ESMA), along with the European Banking Authority (EBA), must now start drafting the technical standards which will be included in the text of EMIR.  The original deadline for the publication of these standards had been June 30, 2012, however, as a result of the delays in agreeing the final text, this deadline has been pushed back to September 30, 2012.  

By pushing back the deadline, ESMA and the EBA will be given sufficient time to seek the views of market participants on the levels of technical standards that should be adopted.  A public consultation on these standards is due to be launched around the end of February or beginning of March 2012, to which all market participants are strongly encouraged to contribute.  The technical standards concern matters including, inter alia, the clearing and reporting thresholds to be imposed on non-financial counterparties and the publication, by trade repositories, of aggregate positions by class of derivatives.   

With the deadline of the publication of technical standards being pushed back to the end of September, the 27 Member States of the European Union and market participants will then have less than three months to ensure that they have in place all the adequate systems to ensure full compliance with the regulation.  EMIR is due to come into force at the end of 2012, thus meeting the deadline set by the Group of 20 Summit in Pittsburgh in 2009. There has not yet been any formal indication that this implementation date will be pushed back, despite the delays in agreeing the final text. 

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