by Roland Kielman
Europe’s new regulatory landscape came into sharper focus as the European Market Infrastructure Regulation (EMIR) officially entered into force on March 15. The battery of new regulations is one of the continent’s primary policy responses to the G20 commitment to improve transparency and regulatory oversight of global over-the-counter (OTC) derivative markets.
“With EMIR in place, market participants have a clear road map in terms of the timing for compliance with many of their new regulatory obligations,” said Diana Chan, CEO of EuroCCP. “Though considerable work remains to fully implement the regulation, this was a critical step towards providing increased regulatory certainty to market participants in the E.U. and elsewhere.”
The legislative package initially came into force in August of 2012 and it then fell to the new pan-European regulator, the European Securities and Markets Authority (ESMA), to hammer out many of the proposal’s technical details. The Regulatory Technical Standards were developed with input from the industry during the second half of 2012 before receiving final approval by European lawmakers early this year.
Timeline takes shape
EMIR determines, among other things, the clearing requirements for OTC derivatives, the reporting requirements for all derivatives, the operational standards for equity and derivatives central counterparties (CCPs), such as pan-European clearing house EuroCCP, and the operational standards for derivatives trade repositories like the DTCC Data Repository Limited (DDRL).
With EMIR in place, market participants will soon face compliance with many of the new regulations, including mandatory reporting of derivatives transactions.
Beginning September 23, 2013, European market participants will be required to report all credit and interest rates derivatives transactions to a licensed trade repository – reporting for all other asset classes is expected to commence January 1, 2014. Unlike new regulations being developed elsewhere, EMIR requires both OTC and exchange-traded derivatives to be reported to a repository.
Before this can happen, however, trade repository operators must apply for registration with ESMA, a process that began in mid-March when EMIR officially came into force. DTCC is in the process of registering DDRL with the European regulator, a process that is expected to conclude by early summer. In the meantime, ESMA is poised to offer additional guidance to market participants about the new reporting regime.
“We expect ESMA to issue a series of FAQs on a variety of topics over the course of the next six months, the first of which is expected in April and will address reporting of the first two asset classes,” said Andrew Douglas, DTCC Vice President and Head of European Government Relations. “While policymakers took a rather measured approach in the crafting of this regulation, I think there is recognition of the fact that market participants need all the clarity they can get to ensure a relatively smooth transition into the new derivatives landscape.”
The implementation of EMIR also sets in motion new requirements for CCPs and derivatives clearing. European CCPs, including EuroCCP, began registering with national authorities on March 15 and will have until September 15 to complete the process. National authorities will then have six months following the submission of a complete application to determine whether or not to authorize the CCP; third-country CCP operators will follow a similar timeline for authorization with ESMA.
Mandatory clearing of OTC derivatives transactions will likely not begin until 2014, with ESMA expected to issue additional standards regarding the clearing obligation in September. The standards, which will determine which types of OTC derivatives transactions will face central clearing, will then need to be approved by European lawmakers before entering into force.
While the finalization of the standards offered vital clarity to market participants in terms of the timing of many new requirements, European policymakers have yet to flesh out the details of several key areas of the regulation. Foremost among these are the third-country equivalence determinations, which will dictate the relationship between EMIR and non-E.U. legal and supervisory frameworks, such as the U.S. Dodd-Frank Act. The European Commission, with input from ESMA, is expected to make these assessments by June 2013 for the U.S. and Japan and by July for the remaining jurisdictions in question, which include Hong Kong and Canada, among others.
According to Douglas, the first round of determinations could be influenced by how U.S. regulators, namely the Commodity Futures Trading Commission (CFTC), choose to apply their swaps regime to overseas jurisdictions like the E.U.
“The cross-border application of the CFTC’s swaps rules remains a contentious issue here in Europe and elsewhere,” Douglas notes. “Regulators and market participants are keen to avoid duplicative or inconsistent rules, which could ultimately lead to widespread market uncertainty. It highlights the importance of the regulatory community continuing to work together to achieve maximum harmonization across borders.”
More legislation on the horizon
Although EMIR represents Europe’s main response to OTC derivatives market reform, other legislative proposals will play a key role in determining how Europe’s financial markets are regulated. These include the revision of the Markets in Financial Instruments Directive (MiFID) and the Market Abuse Directive, the revision of the Capital Requirements Directive (CRD IV) and the regulation on Central Securities Depositories.
DTCC will remain actively engaged with European policymakers on these and other issues, with its efforts spearheaded by the company’s Brussels-based Government Relations office.