City of London – Photo David Iliff
(BRUSSELS) – The EU announced reforms to the derivatives sector Thursday, with less burdensome rules to reduce costs and regulatory obligations on market participants without compromising financial stability.
A derivative is a financial contract linked to the future value or status of the underlying to which it refers (e.g. the development of interest rates or of a currency value). Derivatives redistribute risk and can be used both to protect against legitimate risk and for speculative purposes. The European Market Infrastructure Regulation (EMIR) was adopted in 2012 following the financial crisis, to better manage and monitor the risks arising from derivatives markets for financial stability.
Financial Services Commissioner Valdis Dombrovskis said the reforms to EMIR ensure it “achieves its objective of reducing systemic risk in the OTC derivatives market, while keeping costs to a minimum for the real economy.”
The proposal introduces more proportionate rules for corporates. It re-focuses the scope of the clearing obligation for financial counterparties to include some additional relevant market players while exempting the smallest financial counterparties. It also allows for more time to develop clearing solutions for pension funds.
Reporting requirements will also be made ‘more proportionate’; and there will be improvements to ensure the quality of reported data.
The Commission estimates the changes could save market participants, and in particular corporates such as energy companies or manufacturers, up to 2.6 billion in operational costs and up to 6.9 billion in one-off costs.
The Commission has also adopted a Communication setting out its intentions to present further legislative proposals before the summer. It seeks to enhance common EU supervisory arrangements for central counterparties (CCPs), so that the CCPs which play ‘a key systemic role for EU financial markets’ are subject to extra safeguards and enhanced supervision at EU level and/or location requirements.
Main changes to EMIR
Reporting requirements:
Under the proposal, reporting requirements are being streamlined for all counterparties. This will considerably reduce the administrative burden, while ensuring that the quality of data needed for monitoring derivatives markets and identifying financial stability risks is not lost. In particular, derivative transactions concluded on exchanges (so-called ‘exchange-traded derivatives’) will now only be reported by the CCP on behalf of both counterparties. To reduce the burden for all non-financial counterparties (corporates), transactions concluded between companies belonging to the same group (so-called ‘intragroup transactions’) will not have to be reported any longer, if one of the counterparties is a non-financial company. To reduce the burden for small non-financial counterparties, transactions between a financial counterparty and a small non-financial counterparty will be reported by the financial counterparty on behalf of both counterparties. Reporting on historic transactions will no longer be required. In addition, the proposal aims to improve the quality of reported data.
Non-financial counterparties (NFCs):
Non-financial counterparties (corporates), use OTC derivatives to cover themselves against risks directly linked to their commercial or treasury financing activities (‘hedging’). Also in the future, only non-hedging contracts are counted towards the thresholds triggering the clearing obligation. While under the current rules NFCs must clear all derivatives, if they exceed the clearing threshold for one class of derivatives, the Commission is now proposing that NFCs clear only the asset classes for which they have breached the clearing threshold, thereby reducing the burden for NFCs as they only have to centrally clear the asset classes in which they are most active.
Financial counterparties:
Small financial counterparties are numerous but account only for very small volumes of OTC derivatives and of systemic risk. They currently have significant difficulties to find clearing services providers. The proposal introduces a clearing threshold for small financial counterparties, such as small banks or funds. This clearing threshold is based on the volume of OTC derivatives transactions. While all financial counterparties are required to report and collateralise OTC derivative transactions, only counterparties exceeding that threshold would be required to clear centrally.
Pension funds:
Pension funds typically enter into OTC derivative transactions to protect their long-term liabilities to current and future pensioners against complex market risks. While central clearing of such transactions appears important, pension funds do not have normally access to the necessary cash collateral, and no specific solutions have been developed so far. Today’s proposal introduces a new threeyear temporary exemption for pension funds from central clearing. This will allow the various counterparties involved, including pension funds, central counterparties and the clearing members that provide clearing services, to develop a solution that enables pension funds to participate in central clearing without negatively impacting the revenues of future pensioners.
Proposal to amend the European Market Infrastructure Regulation (EMIR) – Q&A
