The European Securities and Markets Authority (ESMA) has put out for consultation the detailed rules that will accompany the European market infrastructure regulation (EMIR), the region’s reform package for OTC derivatives trading.
The consultation on the rules, also known as technical standards, will run until 5 August and follows an initial discussion paper released by the European securities watchdog in February.
As per a 2009 G-20 agreement, EMIR will standardise OTC derivatives instruments where possible so they can be traded on exchange-like platforms and centrally cleared. The rules also call for the creation of trade repositories that collect OTC derivatives transaction data.
The ESMA paper includes a framework for deciding when swaps should be deemed eligible for clearing, risk mitigation requirements for OTC derivatives that are not centrally cleared, and organisational conduct of business and prudential requirements for central counterparties (CCPs).
For determining when derivatives should be eligible for clearing, ESMA will work with CCPs to identify suitable instruments based on liquidity, contract terms and availability of fair pricing information. But the body has stated “no CCP will be forced to clear contracts that it is not able to manage”.
Clearers will also be afforded some discretion when deciding what to accept as collateral, which it said would allow CCPs to provide for a more conservative approach if desired.
The paper also includes proposals on the reporting of derivatives transactions to trade repositories and the criteria CCPs need to satisfy before being recognised under the new legislation.
“OTC derivatives impact both financial markets and the real economy but have not been subject to regulatory requirements. This absence has resulted in negative consequences for financial markets, investors and the real economy,” said ESMA chair Steven Maijoor. “The draft technical standards developed by ESMA set out the measures for the implementation of the regulatory framework established under EMIR. These measures will ensure that EMIR’s objectives of reducing risks arising from OTC derivatives, improving transparency and ensuring sound and resilient central counterparties will be applied in practice.”
The consultation paper will be complemented by a public hearing to be held in Paris on 12 July. After the 5 August deadline, ESMA will then have until 30 September to deliver the technical standards to the European Commission for final approval. EMIR is expected to take effect from the start of next year.