Buy-side Perspectives Issue 9 | Page 29

The main changes to EMIR Reporting requirements: Pension funds: Under the proposal, reporting requirements are being streamlined for all counterparties. This will considerably reduce the administrative burden, while ensuring that the quality of data needed for monitoring derivatives markets and identifying financial stability risks is not lost. In particular, derivative transactions concluded on exchanges (so-called 'exchange- traded derivatives') will now only be reported by the CCP on behalf of both counterparties. To reduce the burden for all non- financial counterparties (corporates), transactions concluded between companies belonging to the same group (so-called 'intragroup transactions') will not have to be reported any longer, if one of the counterparties is a non-financial company. To reduce the burden for small non-financial counterparties, transactions between a financial counterparty and a small non-financial counterparty will be reported by the financial counterparty on behalf of both counterparties. Reporting on historic transactions will no longer be required. In addition, the proposal aims to improve the quality of reported data. Pension funds typically enter into OTC derivative transactions to protect their long-term liabilities to current and future pensioners against complex market risks. While central clearing of such transactions appears important, pension funds do not have normally access to the necessary cash collateral, and no specific solutions have been developed so far. Today's proposal introduces a new three–year temporary exemption for pension funds from central clearing. This will allow the various counterparties involved, including pension funds, central counterparties and the clearing members that provide clearing services, to develop a solution that enables pension funds to participate in central clearing without negatively impacting the revenues of future pensioners. Non-financial counterparties (NFCs): Non-financial counterparties (corporates), use OTC derivatives to cover themselves against risks directly linked to their commercial or treasury financing activities ('hedging'). Also in the future, only non-hedging contracts are counted towards the thresholds triggering the clearing obligation. While under the current rules NFCs must clear all derivatives, if they exceed the clearing threshold for one class of derivatives, the Commission is now proposing that NFCs clear only the asset classes for which they have breached the clearing threshold, thereby reducing the burden for NFCs as they only have to centrally clear the asset classes in which they are most active. Financial counterparties: Small financial counterparties are numerous but account only for very small volumes of OTC derivatives and of systemic risk. They currently have significant difficulties to find clearing services providers. The proposal introduces a clearing threshold for small financial counterparties, such as small banks or funds. This clearing threshold is based on the volume of OTC derivatives transactions. While all financial counterparties are required to report and collateralise OTC derivative transactions, only counterparties exceeding that threshold would be required to clear centrally. Summer 2017 Background A derivative is a financial contract linked to the future value or status of the underlying to which it refers (e.g. the development of interest rates or of a currency value). Derivatives redistribute risk and can be used both to protect against legitimate risk and for speculative purposes. Most derivative contracts are not traded on an exchange but are instead privately negotiated between two counterparties (OTC). The global outstanding notional value of OTC derivatives amounted to USD 544 trillion, corresponding to 89% of the overall derivatives market as of end June 2016 (Source: Bank for international settlements). EMIR implements the 2009 G20 commitment to increase the stab ility of the OTC derivatives market in the EU. The main objective of EMIR is to reduce systemic risk by increasing the transparency of the OTC derivatives market, by mitigating the counterparty credit risk and by reducing the operational risk associated with OTC derivatives. It includes several measures: that all standardised OTC derivatives contracts be cleared through central counterparties (CCPs) and that OTC derivatives contracts be reported to trade repositories (TRs). The need to eliminate disproportionate costs and burdens and to simplify rules without putting financial stability at risk were identified in an extensive assessment of EMIR by the Commission. It included a public consultation in 2015 and Call for Evidence on the EU Regulatory framework for financial services carried out between September 2015 and January 2016 that led, in November 2016, to the adoption by the Commission of a general report on EMIR and to the proposal adopted today. www.buysideintel.com 29