On the 23rd February 2013 the Technical Standards for implementing EMIR (The European Market Infrastructure Regulation) were published in the Official Journal of the European Union. They will enter into force on 15th March 2013. As with the Dodd-Frank Act in the US, the aim of this legislation is to reduce the risk caused by a participant going bankrupt by requiring mandatory clearing on some products and to increase transparency by requiring trades to be reported to Trade Repositories which will provide information to regulators.
The origin of Dodd-Frank and EMIR is the G20 summit which took place in 2009. At that summit the leaders of the G20 agreed on financial services reform, and issued the following statement:
“All standardised OTC derivatives contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties (CCPs) by end 2012 at the latest. OTC derivatives contracts should be reported to Trade Repositories. Non-centrally cleared contracts should be subject to higher capital requirements.”
The European Parliament passed the legislation enacting EMIR on August 16th, 2012, but delegated some technical standards to the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA). The technical standards provide detail on the obligation to clear and report trades as well as risk mitigation requirements and registration requirements for Central Counterparties (CCPs) and Trade Repositories. The draft technical standards were published 27th September 2012 and were adopted by the European Commission in December 2012. They were then reviewed by the EU Parliament and Council and passed on 19th February 2013.
The next stage in the EMIR roadmap is the registration of Central counterparties and Trade Repositories. The deadline for a trade repository to register is 6 months after the technical standards were adopted by the European Commission (May 2013). It is expected that potential repositories will submit applications in late March/early April to allow ESMA time to review and approve their applications.
Reporting to Trade Repositories for Credit and Rates Derivatives will start on 1st July 2013 if a Trade Repository is registered before 1st April, otherwise reporting starts 90 days after a Trade Repository is registered. For Equity, Foreign Exchange and Commodity Derivatives reporting will start on 1st January 2014 if a Trade Repository is registered by 1st October 2013, otherwise reporting starts 90 days after a Trade Repository for these asset classes is registered.
The approach taken to mandatory clearing for EMIR is similar to Dodd-Frank. Products which are already being cleared will be examined to see if they should be made mandatory clearable (i.e. all trades must be cleared). Products for which there is currently no clearing available will be examined to see if clearing should be mandated (which will force CCPs to start clearing that product). The first clearing obligations are expected in Q1 2014. In all cases the aim is to reduce the risk in the system caused by Derivatives.
EMIR provides 90 days after reporting starts to backload existing trades and 3 years to report trades which are expired or cancelled but which were active on 16th August 2012.
Differences between Dodd-Frank and EMIR
Dodd-Frank and EMIR are very similar. The main differences are:
EMIR requires more detail about the collateral posted for a non-cleared trade.
EMIR requires both parties to a trade to report the details to a Trade Repository.
EMIR requires exchange traded derivatives to be reported.
Dodd-Frank requires real-time reporting of some trade details, EMIR is reporting at end of day.
Who will be impacted most by EMIR?
EMIR will have most impact on smaller participants who are exempt from existing trade reporting requirements and who have not had to report under Dodd-Frank. Although EMIR allows the reporting to be delegated to a 3rd party, they retain the legal responsibility for reporting.