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ESMA recommends streamlined EMIR framework

The European Markets Infrastructure Regulation (EMIR) framework should be streamlined to ensure investor protection, the European Securities and Markets Authority (ESMA) has said. 17 Aug 2015

In four reports released simultaneously ESMA recommended changes to the EMIR regulatory and supervisory framework, which covers derivatives, central counterparties and trade repositories. These include simpler identification of high risk non-financial central counterparties (NFCs) and clearer rules and standards.

Steven Maijoor, ESMA chair, said: "EMIR is a key component of the EU’s regulatory reform package in response to the financial crisis affecting many elements of OTC derivatives markets. While its implementation is still underway we recommend a number of changes, based on our experiences, to improve and streamline the regulatory and supervisory framework and to ensure that the objectives of stability and investor protection are met."

Three of the reports looked at different aspects of EMIR and propose how it can be improved. Suggestions included changing the criteria used to identify high risk NFCs in OTC (over the counter) derivatives while making processes easier for lower-risk bodies.

ESMA also proposed clearer rules for calculating margin requirements for central counterparties, including regular testing and sharing of results, and the use of regulatory technical standards to make  segregation and portability requirements clearer.

Central counterparties (CCPs) stand between two parties during a trade to ensure financial performance if one of them defaults. EMIR classifies counterparties to derivatives trades as either financial counterparties (FCs) or non-financial counterparties (NFCs). FCs include banks, insurers, investment firms and fund managers, while a non-financial counterparty is defined by EMIR as any EU 'undertaking' other than an FC or a CPP.

In its fourth report, ESMA provided a contribution to the European Commission's own consultation on the EMIR review. It recommended streamlining the process for determining clearing obligations and introducing tools to allow the suspension of these obligations under certain market conditions.

That report also included recommendations for arevised approach to recognising third-country CCPs. ESMA proposed a new process of recognising CCPs to respond to regulatory differences between countries and to allow it to deny recognition of a third-country CCP where it believes the risk is too high.

ESMA also plans to change its own supervisory powers on trade repositories, with increased fines and more enforcement powers available, the report said.

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