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.
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