This Friday 15 March 2013, the first set of regulatory technical standards relating to the European Union’s implementation of the G20 commitments on over-the-counter derivatives will come into force under the European Market Infrastructure Regulation (“EMIR”). With this come the first of many obligations, some of which can have a reach beyond Europe. For Australians, it sounds like Dodd-Frank, all over again.
It is difficult to know how much Australians should be concerned about this stage of EMIR’s development. This is because, in an all too familiar story for global derivatives regulatory reform, much of the cross-border impact of EMIR seems yet to be determined. For example, it is possible that some obligations under EMIR may extend to non-EU entities that would not otherwise be subject to them. How those obligations ultimately reach beyond Europe’s borders depends on how the European Securities and Market Authority interprets what having a contract with “direct, substantial and foreseeable effect within the EU” actually means.
EMIR v Dodd Frank
For most affected Australians, their EMIR analysis is likely to be based on a comparison with the requirements under the Dodd-Frank Act in the United States. With Dodd-Frank often considered (and hoped to be) the “high-water mark” for most of the G20 OTC derivative reforms, the EMIR obligations are generally expected (and hoped) to fall within Dodd-Frank’s already extensive reach.
Indeed, for the most part, this assumption appears correct. The objectives and overall categories of obligations under EMIR and Dodd-Frank are broadly similar – although this is hardly surprising given both reflect the G20 commitments. And the similarities don’t end there. Take the lack of cross-border guidance, the uncertainty over the legal interpretation of requirements which are going to apply all too soon, and the lack of clarity on exactly when, who, and with whom some requirements apply. The EMIR and Dodd-Frank processes have much in common.
However, some potentially nasty surprises lurk beyond a high-level comparison between EMIR and Dodd-Frank. Seemingly minor differences between, for example, the risk mitigation obligations under EMIR and the corresponding obligations under Dodd-Frank potentially mean that some EMIR obligations may require additional ‘tweaking’ of current systems and processes in order for entities to fall within the new EMIR requirements. The extent to which Australians need to prepare for this remains unknown, as the cross-border requirements are not yet released.
To be or not to be a Financial Counterparty – that is the question
Unfortunately for Australian banks, one of the biggest questions under EMIR – being the treatment of EU branches of non-EU entities and particularly whether those branches will be required to comply with additional obligations (or whether they will be treated as “Financial Counterparties” for the purposes of the regulation) – remains officially unanswered. Just as with Dodd-Frank, market participants are again uncertain as to the extent of the obligations with which they may be required to comply – despite the first real practical compliance date under EMIR being only days away.
Is anything clear now?
Despite this uncertainty, there are some things which are known. For example, certain Australian counterparties will be required to clear OTC derivatives contracts where the contract type and the EU counterparty they are trading with are both subject to the clearing obligation under EMIR. However, with the first mandatory clearing obligations not expected under EMIR until 2014, entities will hopefully have the benefit of the cross-border analysis by the time compliance is required.
No time to take a breath
As this new wave of offshore G20 regulations washes over Australian market participants, it is anticipated that there is still more to come. The global regulatory surf is unpredictable and unrelenting. There doesn’t seem to be any time to take a breath. However, with EMIR, Australian market participants can take comfort that it (including its current underlying technical standards), is only around 150 pages long – about 900 pages shorter than Dodd-Frank on derivatives. We should be thankful for that, at least.