On 13 August 2015, the European Securities and Markets Authority (ESMA) published four reports regarding the functioning of the European Markets Infrastructure Regulation (EU) 648/2012 (EMIR) framework, offering its input on a wide range of areas covered by the rules, and suggesting various amendments to enhance their overall effect. ESMA also provides additional suggestions and recommendations in response to the European Commission’s EMIR Review consultation.

EMIR Review Report no. 1: Review on the use of OTC derivatives by non-financial counterparties

The report provides an overview of non-financial counterparties (NFCs), their classification and their systemic importance in over-the-counter (OTC) derivatives markets. Before carrying out an analysis of the use of OTC derivatives by NFCs, ESMA faced issues in relation to the categorisation of counterparties as financial counterparties (FCs) or NFCs, primarily because (i) a non-negligible number of entities report some of their trades as FCs and others as NFCs; and (ii) a number of entities whose primary purpose it is to invest in the financial markets, including a number of hedge funds, nonetheless fall within the definition of an NFC under EMIR. ESMA carried out a counterparty reclassification, based on certain assumptions, in order to remove bias from its review into the use of OTC derivatives that would otherwise be caused by (i) the activities of FCs incorrectly reporting their trades as NFCs; and (ii) the activities of entities that are generally understood to be FCs but fall outside the EMIR definition (such as certain hedge funds and certain securitisation vehicles) (Quasi-FCs). Having identified the above issues in its analysis of the use of OTC derivatives, ESMA concludes that the European Commission should consider establishing a process whereby Quasi-FCs can be distinguished accurately from “true” NFCs, after which it should be considered whether it would be appropriate to amend EMIR so that Quasi-FCs no longer fall within the definition of an NFC.

ESMA’s analysis of the systemic importance of NFCs  in OTC derivatives markets reveals that the systemic relevance of NFCs on the whole is minor. However, the data also shows that NFCs are of significant importance in the Commodity OTC derivatives market and to a lesser extent in the FX OTC derivatives market.

ESMA’s report also recommends an overall simplification of the framework applicable to NFCs, so that only the entities that qualify as “NFCs+” (NFCs which have exceeded the clearing threshold) are in effect the ones that pose the most significant risks to the system. ESMA’s data revealed that a number of NFCs did not reach the clearing threshold due to hedging transactions being discounted from the relevant calculation, even though their portfolios of OTC derivatives (including those entered into for hedging purposes) were larger than a number of NFCs+. ESMA proposes that the systemic importance of NFCs should be assessed solely by taking into account their outstanding positions and not the hedging/non-hedging nature of their trades.

EMIR Review Report no. 2: Review on the efficiency of margining requirements to limit procyclicality

This report focuses on the prudential standards for central counterparties (CCPs) introduced by EMIR, particularly margining and collateral requirements which aim to address procyclicality. ESMA states that the EMIR prudential provisions have enabled CCPs to control risks and procyclical effects. ESMA’s main proposals for further reform include: further obligations on CCPs to regularly test the efficiency of the procyclicality treatment arrangements for all risk factors; further prescription by ESMA of the options available to CCPs to address procyclicality in order to increase their effectiveness; ESMA’s mandate under EMIR to be extended so that ESMA is able to specify the frequency of monitoring and revising margin parameters, and the information that must be disclosed by CCPs either to the public or to clearing members; and changes to the EMIR framework so that CCPs are required to take into account potentially procyclical effects when revising the list of acceptable collateral and haircuts, coupled with a requirement for CCPs to consider scenarios of extreme but plausible market conditions when setting the haircuts.

In addition, ESMA highlights the importance of  further international convergence in this area in avoiding regulatory arbitrage. Further convergence is  of particular importance to European CCPs, which face more prescriptive requirements than their international counterparts.

EMIR Review Report no. 3: Review on the segregation and portability requirements

The purpose of the report is to provide an overall review of the segregation and portability provisions set out in the EMIR framework. The existing segregation and portability provisions provide some level of protection to clients of clearing members in case of a clearing member default. ESMA recommends that more legal certainty and enforceability of the framework over national insolvency laws should be established by setting out, in a revision of EMIR, the rights that correspond to the different account structures. The report also suggests that further level 2 legislation would clarify EMIR requirements  and provide added protection. For example, the possible account types available to clients should be set out more clearly, along with the corresponding rights and benefits. ESMA also proposes enhanced monitoring of the implementation of different types of account model in  its report.

EMIR Review Report no. 4: ESMA input as part of the Commission consultation on the EMIR review

In this final report ESMA provides its input into the EU Commission’s consultation on the EMIR review. ESMA discusses a number of EMIR provisions and issues arising out of them, as well as suggesting a number of measures that could enhance the effectiveness and the consistent application of the framework. Some of the key areas in relation to which ESMA recommends amendments to the EMIR framework are set out below.

Clearing Obligation

ESMA proposes that a more flexible clearing obligation procedure should be established. The report identifies some rigidity in the trigger to launch the procedure and the timeframe to complete it. ESMA considers that the clearing obligation procedure should be reviewed with the aim of making it more responsive to industry needs.

The EMIR framework lacks a mechanism to temporarily suspend the clearing obligation. As a result, authorities would be unable to act swiftly in response to a rapid market event in circumstances where it is desirable to temporarily suspend the clearing obligation (such as a major default). ESMA considers that there should be an EU-level mechanism to allow a temporary suspension on short notice.

Importantly, ESMA also invites the EU Commission to consider removing the frontloading obligation (i.e. the obligation that contracts entered into before the date on which the clearing obligation takes effect must be cleared, subject to certain conditions) in relation to cleared transactions, because of the uncertainty it creates and the cost it generates.

Intragroup Transactions

EMIR provides that intragroup transactions can be exempted from the clearing obligation under certain conditions. However, ESMA considers that Article 3 of EMIR should be redrafted to provide more clarity in relation to the use of the intragroup exemption where the transaction involves a non-EU group counterparty.

Trade Reporting Obligations

ESMA proposes a review of the obligation to report Exchange Traded Derivative (ETD) contracts given the substantial number of such trades being transacted on a daily basis and the significant burden they impose on counterparties due to increased reporting costs and data storage capacity. Although ESMA stops short of recommending that the scale of reporting of ETD transactions is reduced, it “stands ready to advise the Commission on that matter”.

In relation to the reporting obligations for NFCs, ESMA recommends that the EMIR framework is aligned with the provisions (as currently drafted) of the proposed Securities Financing Transactions Regulation, as ESMA takes the view that different reporting requirements between the two regulations could lead to errors in reporting which would reduce the overall quality of data.

Furthermore, ESMA recommends waiving the obligation to report contracts that were terminated before the reporting start date, which was 12 February 2014.

Finally, ESMA recommends amending EMIR so that it is empowered to prescribe further specifications on the content and format of EMIR reports.


On 6 August 2015, the European Commission published  a press release announcing the adoption of a Commission Delegated Regulation prescribing the mandatory clearing of certain over-the-counter (OTC) interest rate derivative contracts through central counterparties (CCPs) pursuant to the European Markets Infrastructure Regulation (EU) 648/2012 (EMIR). The intention behind the requirement to clear such trades is to make financial markets more stable and transparent.

Interest rate derivatives represent the largest volume  of all OTC derivative products (around 80% of all global derivatives). The European Securities and Markets Authority (ESMA) had previously published a consultation paper addressing the clearing obligation in relation to interest rate derivative contracts on 17 July 2014. On 1 October 2014, ESMA submitted to the European Commission its final report endorsing the clearing obligation for OTC interest rate derivatives.The adoption of the Commission Delegated Regulation is the next step of this procedure.

The Commission Delegated Regulation covers interest rate swaps denominated in euro, pound sterling, Japanese yen or US dollars. The contracts to which the rules relate are fixed-to-float interest rate swaps (“IRS” or “plain vanilla” derivatives), float-to-float swaps (“basis swaps”), forward rate agreements and overnight index swaps.

Regarding their implementation, there are four phase- in periods, ranging from six to 36 months, depending on the category of the counterparty. The first category covers financial and non-financial counterparties which on the day of the enforcement of the regulation are already members of the authorised CCPs and are therefore familiar with clearing obligations. The second and third categories of counterparties are grouped according to their legal and operational capacity and their systemic importance in the market, i.e. they are categorised according to the aggregate notional monthly amount of non-centrally cleared derivatives. The fourth category includes non-financial counterparties which are less experienced with central clearing.

The regulation will come into force subject to review by the EU Parliament and the EU Council. The review period will take several months.


On 30 July 2015, the European Securities and Markets Authority (ESMA) published its advice to the European Commission, the European Parliament and the Council of Europe on the application of EU passporting rights to non-EU Alternative Investment Fund Managers (AIFMs) and Alternative Investment Funds (AIFs) under the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD).

AIFMD makes provision for the passport, currently reserved for EU AIFMs and AIFs, to be potentially extended to non-EU AIFMs and AIFs in the future. In its advice, ESMA considers whether there are significant obstacles in relation to investor protection, potential market disruption and monitoring systemic risk which impede the extension of the passport to six non-EU countries: Guernsey, Hong Kong, Jersey, Switzerland, Singapore and the United States.

ESMA advises that no significant obstacles exist to the extension of the AIFMD passport to Guernsey and Jersey, and that all remaining obstacles posed in relation to Switzerland will be removed by the enactment of pending amendments to Swiss legislation expected to come into force on 1 January 2016. ESMA concluded that a decision on the application of the passport to Hong Kong, Singapore and the United States should be delayed until certain obstacles are removed or ESMA is able to consider further evidence in relation to each country’s regulatory regime.

Having received the advice, the European Commission will consider whether to extend the AIFMD passport through a delegated act. ESMA suggests in its advice  that the extension of the passport to Guernsey, Jersey and Switzerland should wait until it has given positive advice in relation to a larger number of non-EU countries in order to avoid the adverse market impact that an extension to a small number of non-EU countries might have.

Along with the above advice, ESMA also published an opinion on the functioning of the passport for EU AIFMs, and of the National Private Placement Regimes (NPPRs).

In relation to the functioning of the EU passport, ESMA has identified a number of issues including:

  • different approaches amongst National Competent Authorities (NCAs) having been adopted to marketing rules, in particular in relation to heterogeneity of fees charged by NCAs where AIFs are marketed and the definition of a “professional investor”; and
  • varying interpretations between Member States on what activities constitute “marketing” and “material changes” under the AIFMD passport.

ESMA concludes that there is insufficient evidence to indicate that either the AIFMD passport or the NPPRs have raised significant issues regarding the functioning and the implementation of the AIFMD framework. However, ESMA states that it is difficult to produce a definitive assessment due to the delay in the implementation of AIFMD and the delay in the transposition of the Directive in a number of Member States. For this reason, ESMA suggests there would be merit in it opining further at a later date.


In the last issue of Exchange – International, in our In Focus piece we reported on the proposed provisions  of the Second Payment Services Directive (Directive 2007/64/EC ) (PSD II). On 3 June 2015 the Council of the EU (Council) published its final compromise text of the proposed PSD II. An informal agreement on PSD II was reached between the Council and the European Parliament‘s Economic and Monetary Affairs Committee on 5 May 2015, and the final Council compromise text of PSD II has emerged subsequently. Although the text of the draft PSD II has changed significantly since the previous compromise draft was published by the Council on 2 December 2014, the key provisions of PSD II as set out in our previous issue of Exchange – International remain unchanged.

PSD II will now have to be adopted by the Council and the European Parliament, following which it will be published in the Official Journal of the European Union and become law. The formal adoption of PSD II is expected later in 2015, after which each European Union Member State  will have a period of two years by the end of which it must incorporate the provisions of PSD II into national law.


In the last issue of Exchange – International, we reported on the main changes to the European anti-money laundering and counter-terrorist financing regimes that will be introduced by the Fourth Money Laundering Directive (EU) 2015/849 (MLD4). On 5 June 2015, MLD4 and the Wire Transfer Regulation (EU) 2015/847 (WTR) became law having been published in the Official Journal of the European Union. The MLD4 and the WTR were adopted by the Council of Europe on 20 April 2015 and by the European Parliament on 20 May 2015. Each EU Member State now has two years to implement the provisions of MLD4 through national legislation. As an EU Regulation, the WTR has direct effect and as such has automatically become law in each Member State.


On 29 July 2015, the European Banking Authority (EBA) published a consultation paper on draft guidelines on co-operation agreements between deposit guarantee schemes (DGSs). The recast Deposit Guarantee Schemes Directive (2014/49/EU) aims to promote a uniform level of protection for depositors throughout the EU. The Directive requires effective co-operation between the DGSs and, where appropriate, the designated authorities to have written co-operation agreements in place.

The proposed EBA guidelines:

  • specify the objectives and minimum content of the co-operation agreements, in order to ensure a coherent approach across Member States;
  • include a multilateral framework co-operation agreement to which DGSs should adhere; and
  • provide further guidance to ensure that depositors using EU branches of institutions headquartered in other Member States are treated similarly to depositors in the home Member States of those institutions.

The EBA welcomes comments on the consultation until 29 October 2015.


The Capital Requirements Regulation (CRR) introduced  a capital reduction factor for loans to small and medium- sized enterprises (SMEs) known as the SME Supporting Factor (SF). The SF was introduced in order to partially relieve credit institutions from the cost of holding additional capital pursuant to stricter rules prescribed by the Fourth Capital Requirements Directive and the CRR where lending to SMEs. SMEs, particularly in the EU, are largely reliant on bank lending and the purpose of the SF is to ensure credit institutions provide adequate lending to SMEs.

In summary, for a credit institution to be able to apply an SF of 0.7619 to its capital requirement, the following eligibility criteria must be satisfied:

  • the relevant loan must be allocated to corporate or retail exposures, or be secured by immovable property;
  • the relevant SME must broadly be defined according to the Commission Recommendation concerning the definition of micro, small and medium-sized enterprises (2003/361/EC) (i.e. the standard definition of an “SME” used in EU legislation); and
  • the total amount owed to the credit institution and its group (with an exception for amounts secured on residential property) must be no more than EUR 1.5 million.

On 31 July 2015, the European Banking Authority (EBA) published a discussion paper and call for evidence inviting stakeholders and market players to provide their input, evidence and recommendations regarding bank lending to SMEs and their overall assessment of the SF. The EBA‘s discussion paper provides a brief overview of the role of SMEs in the EU and then outlines the main sources of SME finance, the regulatory requirements imposed on lenders to SMEs, and the significant capital relief that the application of the SF offers credit institutions. It also provides analysis on the overall riskiness of SME- financing in the EU, sets out the SME lending conditions and initiates a preliminary discussion on the impact of the SF on lending. A final EBA report on SMEs and the SF is expected to be published in February 2016.


On 25 August 2015, the Investment Association published a press release announcing an agreement with the Association for Financial Markets in Europe (AFMEon a new code of conduct for the use of “Indications of Interest” (IOIs) in equity capital markets.

The code aims to ensure “block trades”, which are trades in a large number of shares by investment managers, can be carried out with a more predictable market impact. IOIs are used by brokers to express their willingness to buy or sell shares at a given price.

The code distinguishes between two types of IOIs: “Client Natural” IOIs – those which can be satisfied without market impact; and “Potential” IOIs – those that may involve information leakage and market impact. Bloomberg, a market leader in IOI communication, has agreed to adopt the new categorisations. The Investment Association and AFME are now engaging with other relevant vendors to ensure that these options are available to all market participants.

It is hoped that the new code will improve the efficiency of equity capital markets by limiting misleading market noise, enabling investment managers to see where real liquidity is, and to obtain the best price for their clients.