Under Article 85(1) of the European Market Infrastructure Regulation (648/2012/EU) (EMIR), the European Commission (EC) is required to submit a general report on EMIR to the European Parliament and the European Council on the functioning of certain aspects of the EMIR framework. In connection with that review, the European Securities and Markets Authority (ESMA) published four reports providing information for the EC’s review and also providing various recommendations on amending EMIR at both Level 1 and Level 2 provisions.
Report No. 1 – Review of the use of over-the-counter (OTC) derivatives by non-financial counterparties (NFC) – In Report No. 1, ESMA recommends (1) establishing a clear process to ensure that quasi-financial counterparties are identified and not commingled with corporates within the NFC category, and (2) simplifying the determination of NFC+/NFC- by removing the hedging criteria as this may not be the most relevant criteria in determining the systemic relevance of NFCs.
Due to the current classification system between financial counterparties (FCs) and NFCs, there are a number of market participants that operate in the financial markets that fall within the definition of an NFC. As an example, a hedge fund that is not managed by an authorized alternative investment fund manager (AIFM) would by default be categorized as an NFC. By addressing this existing classification gap, ESMA can then further assess whether classifying quasi-financial counterparties as NFCs is justified or whether they should be classified as FCs.
Report No. 2 – Review on the efficiency of margining requirements to limit procyclicality – Report No. 2 provides ESMA’s assessment to the EC regarding the efficiency of margining requirements, which are intended to limit procyclicality and recommends changes at Level 1, including defining additional intervention capacity, as well as changes at Level 2 in the form of regulatory technical standards (RTS). The report highlights that further rules should be provided regarding counter-cyclical tools adopted by central counterparties (CCPs).
Report No. 3 – Review on the segregation and portability requirements – Report No. 3 consists of both a report to the EC on the application of segregation requirements under Article 39 and represents ESMA’s recommendations under Article 85(1)(e) with respect to a CCPs policies on collateral margining and securing requirements. After identifying differences in practices among the CCPs, the report recommends changes to promote convergent practices primarily by issuing RTS.
Report No. 4 – ESMA input as part of the Commission consultation on EMIR review – Report No. 4 recommends amendments to EMIR in a number of areas including (1) the clearing obligation (streamlining the process to determine clearing obligations, introducing tools allowing suspension under certain market conditions and removing the frontloading requirement); (2) recognition of third country CCPs (proposals to review the entire equivalence and recognition process and allowing the jurisdiction decision to be governed by RTS); and (3) trade repositories (TRs)(increasing ESMA’s supervisory and enforcement powers to improve the supervision of trade TRs, including timeframes to consider TR registration applications and other various improvements).
The text of Report No. 1 can be found here.
The text of Report No. 2 can be found here.
The text of Report No. 3 can be found here.
The text of Report No. 4 can be found here.