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European Commission proposes changes to EMIR derivatives rules

The European Commission has proposed reforms to the European Market Infrastructure Regulation (EMIR) to create "simpler and more proportionate rules" for over-the-counter (OTC) derivatives.09 May 2017

EMIR was introduced in the wake of the financial crisis to make financial markets safer and more stable. It aims to reduce risks to the financial system arising from derivatives transactions by increasing the transparency of the OTC derivatives market, where derivative contracts are not traded on an exchange but privately negotiated between two counterparties.

The changes aim to reduce costs and regulatory burdens without compromising financial stability, the Commission said.

The amendments cover streamlined reporting obligations, improvements to the quality of data reported to trade repositories, clearing obligations for non-financial and small financial counterparties and pension funds, central counterparty (CCP) transparency, risk mitigation for non-cleared OTC derivatives contracts, and the registration and supervision of trade repositories.

Transactions between a financial counterparty and a non-financial counterparty not subject to the clearing obligation will now be reported by the financial counterparty on behalf of both counterparties. This is to reduce the reporting burden for small non-financial counterparties, the Commission said.

Transactions between companies belonging to the same group, called 'intragroup transactions', where at least one of the two counterparties is a non-financial company will no longer have to be reported. These trades represent a relatively small proportion of all OTC derivative transactions and do not significantly contribute to systemic risk, it said.

Exchange-traded derivatives (ETDs) will be reported only by the CCP on behalf of both counterparties.

The amended regulations also clarify who has responsibility for reporting in certain specific circumstances, such as in derivative transactions involving a mutual fund or an alternative investment fund. In that situation the management company or manager will have to report the transaction, the Commission said.

Historic transactions that were entered into before the start of the reporting obligation on 12 February 2014 but were not still outstanding on that date will no longer need to be reported. Since many of these transactions are considered obsolete, this change will not have a significant impact on authorities' ability to monitor risk in the derivatives market, the Commission said.

Trade repositories will be required to put procedures in place to check the completeness and accuracy of the data reported to them. They will also have to establish procedures for cross-checking and comparing data with other trade repositories when the other counterparty reported their side of the transaction to a different trade repository, and for the transfer of data to another trade repository if a customer requests it.

Under the current rules non-financial counterparties must clear all derivatives if they exceed the clearing threshold for one class of derivatives. The Commission has proposed that they should only have to clear the asset classes for which they have breached the clearing threshold.

The proposal also introduces a clearing threshold for small financial counterparties, such as small banks or funds, 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, the Commission said.

The proposals include a new three–year temporary exemption for pension funds from central clearing, to give the industry time to develop a solution that allows pension funds to participate in central clearing without "negatively impacting the revenues of future pensioners", the Commission said.

Jyrki Katainen, vice-president for jobs, growth, investment and competitiveness said: "Our aim is to simplify rules as well as to eliminate disproportionate costs and burdens to small companies in the financial sector, corporates and pension funds. The targeted changes will deliver real benefits for the industry, without endangering financial stability. Building on consultations with stakeholders, this is a prime example of better regulation."