Political pressure is growing for the Council of the European Union to fix the scope of the European market infrastructure regulation (EMIR) by 20 June.
EMIR will set the rules for more transparent trading and clearing of cash and derivatives instruments in Europe, potentially reducing trading costs and systemic risk. However, disagreements remain over which instruments should be included. If these cannot be resolved in the coming weeks, the risk of Europe failing to meet deadlines set by the Group of 20 will increase significantly.
Representatives of European governments met on 30 May to discuss the latest draft proposal put forward by the Hungarian presidency, which terminates at the end of June, to be replaced by Poland. This included a new framework for the development of technical standards to be used by pan-European regulator European Securities and Markets Authority (ESMA) to determine the classes of derivatives that would fall under the remit of EMIR.
With several issues still being debated, another compromise text is expected before the next Council meeting on 8 June.
As originally proposed by the European Commission (EC) in September 2010, EMIR provides a framework for central clearing and risk mitigation of over-the-counter (OTC) derivatives, rules for central counterparties (CCPs), post-trade interoperability, reporting obligations and requirements for trade repositories.
The regulation aims to bring Europe in line with a commitment by the Group of 20 nations that all standardised OTC derivative contracts should be cleared through CCPs by end of 2012 at the latest and that OTC derivative contracts should be reported to trade repositories.
The final legislation must be approved by the European Parliament and the Council to be passed into law. The Economic and Monetary Affairs Committee (ECON) of the European Parliament voted through a draft proposal on 24 May, which is expected to be adopted by the Parliament itself in a vote on 5 July.
The parliamentary draft established a set of rules for interoperability arrangements between cash clearing houses, but similar arrangements may only be undertaken between derivatives clearing houses at 2014 at the earliest, subject to a review by ESMA. Interoperability between clearers in cash equities will allow them to compete with each other on price, theoretically reducing the overall cost of trading.
The latest compromise document proposed by the presidency of the Council supports this approach. Like the parliamentary draft, it restricts the obligation of central clearing to OTC derivatives, while all contracts, OTC and exchange-traded, should be reported to trade repositories. It also tasks the EC with identifying the classes of OTC derivatives to be cleared, based on the technical standards drawn up by ESMA.
In earlier drafts the Presidency had proposed clearing interoperability for exchange-traded derivatives, an amend that would have required siloed clearing houses to offer clearing at equitable rates to rival trading venues.
For a derivatives exchange such as Eurex, which is joint-owned by Deutsche Börse and SIX Swiss Exchange, the value of owning clearing operations would be diminished in theory if other venues were able to use the facility without being charged a premium. Eurex and its clearing operations, is considered to be a valuable asset in the proposed merger between Germany's Deutsche Börse and transatlantic exchange owner NYSE Euronext.
The current presidency proposal also determines that CCPs shall, where practicable and available, use central bank money to settle transactions. ECON proposed that liquidity could be derived from either central or commercial bank liquidity sources or a combination.
Sticking points in the Council negotiations are said to be the clearing eligibility criteria, central bank liquidity, the roles of ESMA and national regulators in the new supervisory regime and the possible exemption for pension funds of clearing obligations.
Sources have said that the Council is under pressure to reach an agreement to enable the document to be passed in a ”general approach' meeting held on 20 June. The general approach is an informal decision making process by which the support of council members is assessed without votes being cast. This allows further negotiations to take place in Council if necessary before an agreed Council text is taken to the Parliament.
The rapporteur for EMIR in Parliament, Werner Langen MEP, proposed that the Parliament's plenary vote should take place before negotiations with the Council, which some have suggested could delay the adoption of a final version of EMIR until after the summer break.
On 27 May Jean-Pierre Jouyet, chairman of French regulator Autorité des Marchés Financiers, said that OTC derivatives regulation was at the top of regulators' priority list.
“On the world market, Europe and the United States must strive to reach an agreement on rules that are if not strictly identical, then at least as harmonised as possible, both on the products that should be traded on these markets and on the regulation of these new facilities,” he said.