The derivatives market is to be made safer and more transparent under new EU regulations. The regulations also establish common organisational, business conduct and prudential standards for counterparties and trade repositories.
They apply to any entity registered in a EU member state, whether or not involved in financial services, entering into any form of derivative contract, including interest rate, foreign exchange, equity, credit and commodity derivatives. It applies indirectly to non-EU firms trading with EU firms.
The main requirements are:
- Reporting to a registered trade repository a wide range of information about every derivative contract that they enter into, modify or terminate. The reporting obligation (but not liability) for doing this can be delegated to a third party.
- Implementing new risk management standards, including operational processes and margining, for all bilateral over-the-counter (OTC) derivatives (ie trades not cleared by a central counterparty). This means they must adopt appropriate procedures and arrangements to measure, monitor and mitigate operational risk and counterparty credit risk. Financial counterparties (ie credit institutions, investment firms, insurance/reinsurance firms, UCITS, etc) and in certain cases, non-financial counterparties also mark-to-market on a daily basis the value of outstanding contracts.
- Clearing, via a central counterparty, those OTC derivatives subject to a mandatory clearing obligation. Broadly speaking, non-financial counterparties have to clear derivative transactions above a certain threshold, and those entered into with a financial counterparty, among others. The scope of clearing obligations for financial counterparties is much wider, with very few exceptions. Some transactions such as hedging, do not count towards the threshold, while others, such as intra-group transactions, may be exempt on request from clearing for both financial and non-financial counterparties.
The regulations were introduced across the EU from 16 August 2012 but most provisions did not take effect until 15 March 2013, when technical standards (on OTC Derivatives, Reporting to Trade Repositories and Requirements for Trade Repositories and Central Counterparties) were passed through the EU Parliament and Council and then brought into force.
Decisions about the procedures and sanctions to apply in the event of non-compliance are left to national legislators. These have yet to be adopted in Hungary, but the minimum sanction will be a supervisory fine.
Law: The European Market Infrastructure Regulation No 648/2012