ESMA Regulation - Final Report - Draft Technical Standards for the Regulation on OTC Derivatives, CCPs and Trade Repositories - September 27, 2012

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Timeline - European Market Infrastructure Regulation
Proposal Date EC Approval Effective Date
September 15, 2010 December 19, 2012 March 15, 2013

On September 27, 2012 The European Securities and Markets Authority (ESMA), published the final report of its Draft Technical Standards for the Regulation on OTC Derivatives, CCPs and Trade Repositories, also known as the European Market Infrastructure Regulation, or "EMIR." <ref>ESMA defines standards for derivatives and CCPs. ESMA. Retrieved on October 4, 2012.</ref> EMIR introduces new methods to improve transparency and decreased risks associated with the OTC derivatives market while creating common rules for CCPs and for TRs. This final report includes the feedback from the June 25, 2012 consultation and the proposed changes made by ESMA.

The European Commission has until the end of 2012 to amend or adopt the technical standards.

Background[edit]

On September 15, 2010, the European Commission published its final proposal for EMIR, which sets out to increase stability within OTC derivative markets by introducing:

  • a reporting obligation for OTC derivatives;
  • a clearing obligation for eligible OTC derivatives;
  • measures to reduce counterparty credit risk and operational risk for bilaterally cleared OTC derivatives;
  • common rules for central counterparties (CCPs) and for trade repositories; and 
  • rules on the establishment of interoperability between CCPs. <ref>European Market Infrastructure Regulation (EMIR). Financial Services Authority. Retrieved on September 18, 2012.</ref>

On February 9, 2012, the European Parliament, the Council and the European Commission reached a political agreement on the Regulation of the European Parliament and the Council on OTC derivative transactions, central counterparties (CCPs) and trade repositories (TRs). This became known as the European Market Infrastructures Regulation (EMIR), or "the Regulation". On July 4, 2012 the European Commission adopted EMIR, and set the effective date as August 16, 2012.

On June 25, 2012, ESMA, published a consultation, Draft Technical Standards for the Regulation for EMIR. <ref>ESMA proposes rules on derivatives, central counterparties and trade repositories. ESMA. Retrieved on September 18, 2012.</ref> The 293 page document consisted of the rationale and justification for the standards, consisting largely of responses to the earlier discussion paper, followed by seven Annexes. Annex 1 contains excerpts from the EMIR text, which required ESMA to create the standards. Annexes 2-6 contained the actual technical standards (see below). Annex 7 is a cost-benefit analysis of the standards. ESMA accepted comments on the consultation paper until August 5, 2012. Comments can be viewed HERE.

Summary of the Final Report[edit]

Reporting

  • Details of which derivatives transactions need to be reported to trade repositories, including:
    • the information to be provided to ESMA for the authorization and supervision; and
    • the data to be made available to relevant authorities and the public.
  • ESMA has clarified that reporting of collateral can be done on a portfolio basis and that reporting of mark to market values is only applicable to counterparties required to submit daily. This does not include non-financials under the threshold.
  • ESMA extended the provisions on access by the relevant authorities to ensure that they will be able to fulfill their mandates.

Clearing

  • ESMA clarified that employee benefits (such as stock options) and acquisitions would be covered by the hedging definition.
  • ESMA sets the threshold level (between one and three billion euros, depending on the asset class) and the way to calculate the non-hedging positions (gross notional value), which is mostly unchanged compared to the consultation paper.

Counterparty Risks

  • ESMA sets out the risk mitigation techniques for non-cleared OTC derivatives, such as timely confirmation, portfolio compression and reconciliation
  • ESMA has introduced phase-in periods for all requirements and adjusted the frequency of reconciliation;
  • The requirements for clearing members under an indirect clearing arrangement have been substantially modified, but still ensure equivalent protection to indirect clients.

Central Counterparty Financial Requirements

  • ESMA defined a set of organizational, business conduct standards and prudential requirements for CCPs including
    • margin requirements,
    • default fund and default waterfall,
    • liquidity risk management,
    • investment policy of CCPs, and
    • stress and back tests:
  • ESMA has maintained the 99.5% minimum confidence interval for OTC derivatives, but clarified that a lower percentage can be used for products similar to exchange traded ones;
  • The new calculation of the look-back period has been extended to at least one year, including stressed market conditions and procyclicality.
  • The two-day minimum liquidation period for margin calculation has been maintained;
  • More flexibility has been introduced for the models applicable to portfolio margining;
  • The "skin in the game", as a percentage of the minimum capital, has been reduced to 25% from the initial 50%.
  • The conditions for the backing of bank guarantees has been revised and a delayed date of application introduced for energy markets.

Related Document: ESMA Final Draft Technical Standards for EMIR[edit]

References[edit]

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