While 2013 was a busy year for the European Securities and Markets Authority (ESMA), which was busy implementing both the Alternative Investment Fund Managers Directive and European market infrastructure regulation (EMIR), 2014 will see the latter enter its final, crucial stages of development.
On 23 February 2013, ESMA published EMIR’s technical standards based on European legislation, formally kicking off the complex process of reforming and strengthening Europe’s derivatives trading market structure.
Several weeks later on 15 March, these regulations entered into force, starting a series of timetables for the industry to comply with aspects EMIR and opening the gates for trade repositories (TRs) to begin applying for registration.
Late in 2013, ESMA approved six trade repositories: the Depository Trust and Clearing Corporation (DTCC)’s Derivatives Repository; the Central Securities Depository of Poland (KDPW); REGIS-TR, a joint venture by Iberclear and Clearstream; the London Stock Exchange’s UnaVista; ICE Trade Vault Europe; and CME Trade Repository.
The approval of these TRs was a signpost to the first major regulatory deadline of 2014. On 12 February, counterparties will be required to begin reporting all trades in all asset classes covered in EMIR to a trade repository.
Submissions to TRs will consist of 85 individual data fields, including a unique transaction identifier. Furthermore, in contrast to the US’ equivalent regulation, the Dodd-Frank Act, EMIR will require both counterparties to a trade to report to a repository.
Concerns surrounding the implementation of trade reporting include fragmentation, with critics wondering how ESMA will be able to collate and analyse data from six different sources with counterparties to a trade often reporting to two different TRs. There are also fears many derivatives users, particularly among non-financial firms, are not ready to begin reporting in February.
After trade reporting begins, the next key deadline is 15 March 2014, by which time national regulators will have to have authorised central counterparties (CCPs). CCPs had to apply for authorisation to their national regulator by 15 September 2013 to ensure they were able to meet the new standards to centrally clear OTC derivatives trades.
Once CCP authorisations have been completed, ESMA will have six months to draft the regulatory technical standards on the clearing obligation. No later than 15 September 2014, the industry will finally have clarity on how migration to central clearing of OTC derivatives will be effected.
ESMA held a consultation on the clearing obligation under EMIR between July and September 2013, seeking feedback on which classes of OTC derivatives should be subject to the obligation and when the clearing obligation should take place.
Beyond the 15 September submission of the regulatory technical standards, the timeline is unclear but the submission is expected to set out a date (or dates) on which the clearing obligation will begin.
For buy-siders, this will be the most significant deadline in EMIR as it will require them to ensure OTC derivatives contracts covered by the obligation are centrally cleared with a CCP, including any contracts that are outstanding at the time the obligation takes place.
Outside of EMIR’s official timeline, there is also the possibility that further work will be done on making equivalence judgments for CCPs in third countries.
In October 2013, ESMA submitted its equivalence assessments of regulatory regimes in Canada, India, South Korea, Australia, Hong Kong, Singapore and Switzerland.
While it found some regimes met equivalent standards to EMIR, several did not or were viewed as being only partially equivalent.
At present, ESMA has no further orders from the European Commission to conduct any new assessments but has said it expects to receive a further mandate to assess other regulatory regimes, likely to take place in early 2014.
Both European and US regulation has come under fire for its cross-border application of rules, but ESMA has defended the practice.
Steven Maijoor, chair of ESMA, said: We have proposed that those rules, to be taken as equivalent, should be binding and enforceable and therefore should be subject to regulatory oversight, not just left to the discretion of the individual CCP.
“Hence, to avoid any misunderstanding, these individual CCP rules should achieve comparable results; there is no question for us about considering equivalent a regime that offers, in practice, much less protection for CCPs and non-defaulting clearing members, since that would not only lower the safety of the system, but would also give rise to massive regulatory arbitrage.”