The Commission has published a draft Regulation on OTC derivatives, central counterparties and trade repositories (EMIR). This will:
- require trades in the EU in OTC derivatives to be reported to trade repositories, which will make information available to regulators and will also publish aggregate positions. Trade repositories will be registered and supervised by the new European Securities and Markets Authority (ESMA) (that will take over from CESR);
- require centralised clearing through Central Counterparties (CCPs) of all standardised OTC derivatives. ESMA will decide which classes of derivatives should be centrally cleared and, if it identifies a class of contracts that no CCP is currently authorised to clear, regulators will have tools to address this. Eligibility criteria will include reduction of systemic risk, liquidity of contracts, availability of pricing information, CCP capability, and level of client protection the CCP provides. If a contract is not eligible for central clearing, the firm trading it must apply different risk management techniques such as holding more capital (which will be addressed in CRD changes) and exchange of collateral;
- make CCPs subject to more stringent prudential, operational and business requirements, including greater emphasis on capital and internal governance;
- require CCPs that use interoperability arrangements to get approval from their regulator to do so and to have in place appropriate risk management procedures;
- require market participants to measure, monitor and mitigate risks that arise from bespoke contracts that demand significant manual intervention, including increasing electronic confirmations;
- apply the clearing and reporting obligations to financial firms and to non-financial firms that have large positions in OTC derivatives. Contracts between two non-financial firms where neither firm exceeds an "information threshold" (which will be decided by ESMA and is not set in the draft Regulation) will not need to be reported, but any contract involving a financial firm must be reported. Contracts by non-financial firms below a "clearing threshold" (also to be set by ESMA) and contracts entered into for "commercial hedging activities" will not need to be centrally cleared;
- apply in theory to all parts of the OTC derivatives market; and
- allow for recognition by ESMA of third country CCPs and trade repositories.
Council and Parliament now discuss the proposal as part of the co-decision procedure. Member States have agreed to finish all financial reform negotiations by the end of 2011 and the new rules should be in place by the end of 2012 in line with G20 commitments.