Regulation n° 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTCderivatives, central counterparties and trade repositories (EMIR) was published in the Official Journal of the European Union on 27 July 2012. It will come into force on 16 August 2012.
EMIR is yet to be completed, however, by technical standards which were the subject of a public consultation by the European Securities and Markets Authority (ESMA) until 5 August and must be transmitted to the European Commission no later than 30 September 2012. Their publication will set the conditions of the entry into force of the great majority of the provisions in the Regulation.
The AMF draws the attention of those parties concerned to the fact that all these texts will be directly applicable in France: aware as it is of the changes they are likely to make to current practices, the AMF wishes to accompany them in implementing these reforms which are a key component in enhancing stability and financial security. The practical terms of this support will be disclosed at a later date.
In the meantime, and on the occasion of the publication of the European text in the OJEU, the AMF presents below the main consequences of the Regulation regarding counterparties.
1. Obligation to clear OTC derivatives considered eligible by the ESMA:
The Regulation establishes the principle of the obligation to clear all OTC derivatives1 considered eligible by the ESMA in clearing houses authorised to this effect. As a matter of principle, this obligation will apply to all counterparties to an OTC derivative, subject to exemptions concerning intragroup transactions, pension funds or, in certain conditions, non-financial counterparties. This extended use of clearing houses required implementation of a harmonised legal framework – which the AMF had been calling for for several years and which the EMIR now introduces – to ensure that clearing houses comply with strict requirements in terms of capital, organisation and rules of conduct.
Due to implementation of the product eligibility procedure by the ESMA, the definition of the asset classes subject to this clearing obligation is unlikely to come before summer 2013.
2. Implementation of risk-management procedures for OTC derivates that are not cleared:
Counterparties to derivatives not cleared by a CCP must put procedures and arrangements in place to measure, monitor and mitigate operational and counterparty risks. These procedures and arrangements include notably:
- confirmation of the terms of the contract within the timeframe defined by the technical standards,
- robust, resilient processes that are auditable in order to reconcile portfolios, to manage the associated risk and to identify disputes between parties early and resolve them, and to monitor the value of outstanding contracts,
- marking-to-market on a daily basis of the value of outstanding contracts or, where market conditions prevent marking-to-market, use of models,
- timely, accurate and appropriately segregated exchange of collateral.
All these provisions will be completed by the technical standards proposed by the ESMA.
Except for the provisions relating to margins and contract valuation, the AMF draws the attention of those parties concerned to the general scope of application of these provisions: these rules concern all counterparties, including non-financial counterparties whose positions do not exceed the clearing threshold.
3. Obligation to report derivative contract transactions:
The Regulation provides that counterparties and clearing houses ensure that contracts that are concluded, modified or terminated are reported to a trade repository that is registered or recognised by the ESMA. The competent authorities will have direct and immediate access to the data in these central databases to fulfil their mandates. The ESMA will specify the items to be reported through technical standards.
The entry into force of this reporting obligation is subject to the registration or prior recognition of a trade repository, and in any case, will only take place from 1st July 2013.
The AMF reminds you that the provisions on reporting to trade repositories concern all counterparties and all derivatives, including listed derivatives.
Aware of the systemic risk posed by derivatives, the AMF has been very active within the international and European bodies to promote strict requirements in the European Regulation to guarantee the transparency and security of OTC derivative position management, the shortcomings of which have been highlighted in the financial crisis. This text is an essential stage in implementation of the G20 commitments on OTC derivatives. This implementation will only be complete in Europe once the revision of the MiFID has been finally adopted.
The EMIR regulation may be viewed at the following address: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:201:0001:0059:EN:PDF
1OTC: over the counter.