There is no doubt that EMIR is still on track. February 2013 opened with a cliff-hanger of a week that saw the European Securities Market Association (ESMA) (responsible for building the single rule book across European Union financial markets and ensuring
its consistent application and supervision) present for EU Parliamentary scrutiny its Regulatory Technical Standards (RTS) for the European Monetary Infrastructure Regulation (EMIR). The ESMA technical standards were originally published in September 2012,
and are summarised on the ESMA website as:
- Central Clearing for certain classes of OTC derivatives;
- Application of risk mitigation techniques for non-centrally cleared OTC derivatives;
- Reporting to trade repositories;
- Application of organisational, conduct of business and prudential requirements for CCPs;
- Application of requirements for Trade repositories, including the duty to make certain data available to the public and relevant authorities.
Although initially rejected, the proposed RTS were finally approved by the EU Parliament on Thursday Feb 09 2013 - just a few days before the February 19 deadline. This approval however involved a certain amount of last minute ‘horse trading’. Why was this?
Earlier in the week (Tuesday 5 February) the Economic and Monetary Affairs Committee (ECON) of the European Parliament decided to reject ESMA's proposed RTS following a vote of 20 to 24 against. As a backdrop to this vote, it is understood that there had
been some heavy lobbying, arguing the case for the minimum application of EMIR to buy-side firms.
Although some concessions were achieved (e.g. exemption of non-financial firms with trade volumes of less Euro 1Bn in credit and equity derivatives and less than Euro 3 Bn in interest rate derivatives) two key concerns remained. Firstly, there was concern
that any extra regulation would impact smaller players disproportionally (e.g. making hedging prohibitively expensive). Secondly, there was an increased realisation that in order to comply with EMIR margin requirements, market participants would require enormous
amounts of additional collateral over and above the present day levels (current estimates of the total collateral required range from Eur 1tr to Eur 10 tri).
The net effect of these concerns was to raise the possibility amongst European Parliamentarians that adopting ESMA's Regulatory Technical Standards could indeed firstly have a negative impact on the real economy (greater need for collateral for margin purposes)
and secondly that the use of derivatives for hedging purposes could possibly be hampered by EMIR.
Two key concerns were officially recorded following the ECON vote: the first was related to the method of calculating the margin for non-financial institutions and precisely the threshold that would trigger the need of the non-financial institution to comply
with EMIR rules. The RTS appeared to focus on gross notional values of OTC transactions rather than a margin requirement resulting from net margin value. Self evidently the gross method of calculating the margin would inevitably trigger a need to comply with
EMIR earlier than a net measurement. The second key concern was related to the use of Bank guarantees by the buy-side players as collateral. It was felt that these Bank guarantees needed to be more than ‘promises’ from one institution to another. Ideally,
it was felt that any Bank guarantee needed to be fully underpinned by eligible collateral held and available for rapid mobilisation in the event of need.
However, rather than reject the proposed ESMA RTS and risk delaying the adoption of the entire EMIR programme (not to mentioned consequential knock on effects with the US equivalent Dodd Frank Act (DFA)), the European Parliament provided their approval,
subject to provisions that clearing for non-financial firms will be phased in over time and that proposed arrangements for Bank guarantees would be reviewed.
It is clear that the EMIR train is still on the tracks and heading in the right direction (as signalled by the 2009 Pittsburgh G20 summit), all be it with a few carriages having been decoupled in order that work can be carried out in the sidings. The ESMA
Regulatory Technical Standards that make up EMIR will become law in Europe within 20 days of the Parliamentary vote – which means by the end of March 2013! Although certain details still need to be finalised, what is for sure is that the principals of EMIR
are in the process of being codified into law and that it is no longer a case of ‘IF’ but ‘WHEN’ EMIR will be implemented. In light of this, there is no doubt that the compliance processes within all firms that are not yet fully prepared will need to proceed
at full steam ahead.