Annexes to COM(2016)857 - Report under Article 85(1) of Regulation 648/2012 on OTC derivatives, central counterparties and trade repositories

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dossier COM(2016)857 - Report under Article 85(1) of Regulation 648/2012 on OTC derivatives, central counterparties and trade repositories.
document COM(2016)857 EN
date November 23, 2016
agreement) currently required under EMIR for mutual access to data held in trade repositories. Alternative methods for providing access to third country authorities of trade repositories' data that provide appropriate safeguards should therefore be explored.

4.2 Reducing disproportionate costs and burdens

4.2.1. Scope of transactions

Responses pointed to a number of areas where the scope of transactions covered by requirements could be considered unnecessary in achieving the objectives of EMIR.

In particular, it was questioned whether the requirement to clear contracts entered into before the clearing obligation enters into force (so called 'frontloading') is proportionate given the limited number of contracts that this will capture as it is a temporary measure by nature, balanced against the difficulties and uncertainty of applying clearing obligations retrospectively. Companies and industry associations questioned whether it is proportionate to apply operational risk mitigation requirements to intragroup transactions, given that these transactions are undertaken within the same corporate groups where coordination between the counterparties is inherent in the nature of the transactions.

It is appropriate to review to what extent transactions entered into before the clearing obligation enters into force and intragroup transactions should remain in scope of the relevant requirements.

4.2.2. Scope of entities  

a) Non-Financial Counterparties (NFCs)

With respect to the scope of counterparties covered by EMIR requirements, respondents noted that non-financial counterparties (NFCs) face significant challenges in meeting requirements, in particular reporting requirements, due to limited resources and experience. Taking the significance of these challenges into account, many non-financial counterparties questioned whether such counterparties pose systemic risk to a degree that justifies continued application of EMIR requirements. Respondents also noted that EMIR appears to be more stringent with respect to NFCs than many similar regulatory regimes in third countries.

Therefore, it is appropriate to assess whether adjustments should be made to the scope of core requirements under EMIR in order to address the challenges faced by NFCs.

Such adjustments could include removing legal obligations for NFCs to fulfil operational risk mitigation requirements and simplifying the reporting of their transactions. However, such transactions should not be exempt from these requirements entirely in order to preserve the application of the core EMIR objectives in terms of financial stability. Options should be explored to consider whether a) financial counterparties should report derivatives data on behalf of NFCs, b) financial counterparties, but not NFCs, should ensure that operational risk mitigation requirements are applied for transactions with NFCS and c) NFCs should be exempted from reporting their intragroup transactions.

Additionally, in its report on this topic, ESMA provided new insights into the activities of NFCs following the introduction of the EMIR reporting requirements. It is apparent from ESMA's findings that NFCs may be finding the hedging exemption difficult to monitor and apply in practice. This could result in inconsistent regulatory treatment of NFCs across the Union. It is also apparent from the data available that NFCs have a low level of interconnectedness with the financial system as they transact with very few counterparties across the markets; an average of 1-2 per entity compared with financial counterparties which have an average of 31 counterparties per entity.

On the basis of ESMA’s input, it can be concluded that some NFCs are finding the application of the current approach under EMIR burdensome and that it may not substantially reduce systemic risk. However, it is considered that the nature of hedging activity is nonetheless a relevant factor when considering the systemic relevance of NFCs, as entities that hedge are generally not highly leveraged and hold underlying offsetting positions to their OTC derivative contracts.

Therefore, taking into account the limited interconnectedness of NFCs that existing data reveals to exist in the financial system, further consideration should also be given to whether any NFCs, or only some of them based on the volume and type of activity in derivatives markets, should be captured by clearing and margin requirements. 

Such consideration should take into account the fact that some NFCs may be reclassified when MIFID II is implemented.

b) Small Financial Counterparties

In addition to the difficulties faced by NFCs, small financials and industry associations and some public authorities noted that when undertaking limited derivatives activity they were facing significant challenges in establishing the access to clearing necessary to meet upcoming clearing obligations. Respondents considered this was principally due to leverage ratio requirements anticipated by clearing members under the Capital Requirements Regulation 11 , which are perceived as having the potential to make client clearing services too costly for them to offer. Another obstacle noted by respondents was a lack of both flexibility and certainty around segregation and portability options. Respondents pointed out challenges in applying these requirements in particular as they might be difficult to implement in certain Member States' due to domestic insolvency laws. Finally, several respondents suggested that, even if the obstacles mentioned could be resolved, some small financial counterparties subject to clearing requirements undertake such limited activity in OTC derivatives that it is not commercially viable for them to establish clearing solutions. Action to address the obstacles to client clearing should be considered.

c) Pension Scheme Arrangements

Pension scheme arrangements are currently exempt from clearing under EMIR through a Commission Delegated Regulation 12 . This exemption will expire on 16 August 2017 at the latest and can be prolonged for one additional year through another delegated act by the European Commission. As described in the Report from the Commission assessing the progress and effort made by CCPs in developing technical solutions for the transfer by pension scheme arrangements of non-cash collateral as variation margins, as well as the need for any measures to facilitate such solution 13 , clearing solutions for pension scheme arrangements to post non-cash assets as variation margin are however unlikely to be available in the foreseeable future. Once the temporary clearing exemption currently provided for under EMIR expires, pension scheme arrangements will be faced with either (i) relying on repo markets for collateral transformation, or (ii) increasing their cash holdings relative to their non-cash asset holdings. The first scenario may not provide a robust solution in times of market volatility and a strain on capacity of the repo markets could pose liquidity and stability threats to those markets more broadly. The second scenario would have a negative impact on retirement incomes of beneficiaries of the pension scheme arrangements, estimated by the baseline study 14 ordered by the European Commission to be up to 3.66% across the EU over 20-40 years 15 .

An assessment should be made as to whether the current exemption could be prolonged or made permanent without compromising on EMIR's objective of reducing systemic risk as pension scheme arrangements would still be subject to bilateral margin requirements for OTC transactions that are not centrally cleared that mitigate systemic risks.

5. CONCLUSIONS

There does not seem to be a need for fundamental changes to be made to the nature of the core requirements of EMIR, which are integral to ensuring transparency and mitigating systemic risks in the derivatives markets.

Nevertheless, having analysed the input received as part of the EMIR Review process and the Call for Evidence, action should be considered to address the issues identified in this report.

In particular, further assessment is needed in order to determine how to alleviate the challenges identified to allow for a streamlined application of EMIR that could remove excessive regulatory burdens on market participants and enable smoother implementation of the requirements, whilst ensuring that the objectives of EMIR are nonetheless fulfilled. This process should carefully consider the international principles in the derivatives markets field in order to ensure an efficient functioning of global markets. In addition, this initiative would support the Commission's Better Regulation agenda by eliminating unnecessary costs that are currently carried by companies and that could release funds for investing.

The Commission will propose a legislative review of EMIR in 2017, in the framework of REFIT that will be accompanied by an impact assessment which will considers the various issues at stake in more depth. As part of this review the Commission will also assess the relevant technical standards linked to EMIR.

Finally, the Commission is also proposing a legislation on CCP recovery and resolution that deals with elements that are not covered by EMIR, such as recovery planning, resolution planning, and removing impediments to resolvability for CCPs so that their financial distress can be dealt with effectively by authorities without unduly creating financial stability or placing public funds at risk.


(1)

http://www.g20.utoronto.ca/2009/2009communique0925.html

(2)

 Operational risk mitigation requirements refer to requirements under Article 11(1) of EMIR to value, reconcile and confirm non-cleared OTC derivatives transactions and to compress and reconcile portfolios.

(3)

Certain Union and third country public bodies may be exempted from EMIR, in accordance with Article 1(4).

(4)

http://ec.europa.eu/finance/consultations/2015/emir-revision/index_en.htm

(5)

http://ec.europa.eu/finance/consultations/2015/financial-regulatory-framework-review/index_en.htm

(6)

Report of the ESCB on the need for any measure to facilitate the access of CCPs to central bank liquidity facilities

(7)

EMIR Review Report no.1 - Review on the use of OTC derivatives by non-financial counterparties

(8)

ESMA review of CCP colleges under EMIR

(9)

ESRB Report on the efficiency of margining requirements to limit pro-cyclicality and the need to define additional intervention capacity in this area, ESMA's EMIR Review Report no.2 - Review on the efficiency of margining requirements to limit procyclicality

(10)

EMIR Review Report no.3 - Segregation and portability requirements

(11)

Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ L 176 of 27.6.2013

(12)

Commission Delegated Regulation (EU) 2015/1515 of 5 June 2015 amending Regulation (EU) No 648/2012 of the European Parliament and of the Council as regards the extension of the transitional periods related to pension scheme arrangements, OJ L 239 of 15.9.2015

(13)

Report from the Commission to the European Parliament and the Council under Article 85(2) of Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, assessing the progress and effort made by CCPs in developing technical solutions for the transfer by pension scheme arrangements of non-cash collateral as variation margins, as well as the need for any measures to facilitate such solution (COM(2015)39 final of 3.2.2015)

(14)

Baseline report on solutions for the posting of non-cash collateral to central counterparties by pension scheme arrangements - 25 July 2014.

(15)

ibid.