Late on 9 February, the Economic and Monetary Affairs Committee (ECON) in the EP announced it had finally struck a compromise deal with representatives from the European Council (Council) on the Regulation on OTC Derivatives, Central Counterparties (CCPs) and Trade Repositories (TRs) (popularly known as the European Market Infrastructure Regulation or EMIR). The key requirements of EMIR are:

  • to require OTC derivatives contracts to be cleared through CCPs;
  • to require CCPs to be authorised. MEPs argued for, and achieved, a strong role for the European Securities and Markets Authority (ESMA) and for colleges of supervisors, which will make it easier to block authorisation applications of CCPs. ESMA will also have binding mediation powers where national authorities are in dispute over CCP authorisation;
  • to reduce counterparty credit risk by introducing stringent rules on prudential, organisational and conduct of business standards for CCPs, mandatory CCP clearing for standardised contracts and risk mitigation standards for non-CCP cleared contracts. ESMA will use a combination of a “bottom-up” and “top-down” approach to assess (i) which classes of derivatives should be centrally cleared when ESMA has been informed a CCP has been authorised to clear that class, and (ii) what contracts should be subject to central clearing but there is no appropriate authorised CCP;
  • to increase transparency by requiring that all derivatives contracts must be reported to TRs (central data centres). ESMA will be responsible for registering and supervising the TRs, which will publish aggregate positions by class of derivatives. Members of the European Parliament (MEPs) had been keen to ensure this requirement applies more widely than just to OTC derivatives;
  • to reduce operational risk by requiring the use of electronic means for timely confirmation of the terms of trades;
  • to apply the requirements to financial firms and to non-financial firms that have large positions in OTC derivatives;
  • that there are few exemptions. However, pension schemes will enjoy a “light touch” in respect of the clearing obligation, which will apply for two years and then, provided there is proper justification, one additional year. Limited exemptions for contracts by non-financial firms below a “clearing threshold” will also apply, but these thresholds have not been finalised, and will be set by ESMA and other relevant authorities. An exemption has also been introduced for intra-group transactions - but subject to conditions; and
  • that CCPs from third countries may achieve EU recognition only if their home country has an equivalent recognition system to that of the EU. The agreed text introduces tools to manage potential conflicts between EMIR and third-country rules, and an anti-avoidance provision to stop market participants deliberately structuring contracts outside the EU to avoid EMIR.

EMIR now needs the agreement of the EP in plenary session and of the Council. The EP plenary vote was originally scheduled for 12 March but is now expected on 28 March. Once formally adopted, it will enter into force 20 days after it has been published in the Official Journal. The European Commission noted the new rules must be fully in place by the end of 2012 to meet G20 commitments, and will report on the effectiveness of key parts of EMIR no later than three years after it enters into force. (Source: EP and Council Agree EMIR)