The European Securities and Markets Authority (ESMA) has done it again. They quietly published a revised European Market Infrastructure Regulation (EMIR) timeline which postpones commencement of Trade Repository (TR) reporting until February 2014. This is no surprise as the recent third round of their Questions & Answers (Q&A) still left uncertainty among market participants.

There is no doubt that the regulation comes at a significant cost and requires wide-ranging operational enhancements to ensure efficiency. For instance, such costs result from individual segregation, which is required under EMIR to be implemented at the clearing house (CCP) level. Individual segregation ensures portability of client assets and positions to another clearing member (CM) in case a CM defaults and offers protection from fellow customer risk. It requires significant operational and technical expertise and an adequate IT-infrastructure to be able to link assets to particular clients. Infrastructure implementation will be burdensome and find its way into clients’ clearing costs.

Despite the prolonged implementation time, market participants should maintain pressure on their TR initiatives to ensure early finalisation of the reporting processes in order to free up committed resources. These resources could then be applied to mitigate the cost impact of the regulatory burden and to increase process efficiency. A case for efficiency can be made in the areas of: 

• Compliance with risk mitigation techniques: Sophisticated collateral management systems would be the natural route to compliance, but economies of scale might not be achievable due to a lower amount of transactions. This inevitably leads to significant cost in running inefficient processes;
• Capitalisation requirements: The EMIR status of an institution (FC, NFC+/-) determines the applicability of reporting, clearing and risk mitigation techniques, which ultimately has an impact on capitalisation requirements. For an effective transaction pricing and regulatory reporting, front and back office systems need to be synchronised;
• Timely confirmation: EMIR allows negative affirmation, but under rules and general terms and conditions of certain national competent authorities (NCA) (e.g. in Germany) negative affirmation is not possible. The result is a more complex and time consuming confirmation process. Counterparties might run into trouble confirming within the regulatory-driven timeframe.

As market participants struggle with timely regulatory compliance, process and cost efficiency might not yet be on the top of the agenda. It remains to be seen whether further delays and Q&A rounds can dissolve the remaining grey areas in implementing EMIR requirements. However, shifting implementation timelines offer possibilities to reallocate resources and act now.

Additional resources:

www.esma.europa.eu/content/Implementation-Regulation-EU-No-6482012-OTC-derivatives-central-counterparties-and-trade-rep

www.esma.europa.eu/page/European-Market-Infrastructure-Regulation-EMIR