European Commission Proposes Important Changes to EU Derivatives Law
Corporate End-Users welcome changes to EMIR’s reporting rules
May 4, 2017
This week, the European Commission (EC) released its long-awaited recommendations for making adjustments to European derivatives rules. Their recommendations, issued in connection with the EMIR Review, come nearly five years following adoption of the European Market Infrastructure Regulation (EMIR), Europe’s derivatives-related response to the 2008 financial crisis. Among other recommendations, the EC proposed that most corporate end users be relieved of the burden of reporting derivatives transactions to a trade repository. With respect to non-financial counterparties that fall below the clearing threshold (i.e., NFC-s), this move would align European rules with those adopted in most other jurisdictions globally, including the United States. The EC’s reporting-related recommendations are consistent with feedback that Chatham previously has provided to European policymakers on behalf of our end-user clients and represents a positive step forward for them.
EMIR presently imposes a “dual-sided reporting” regime, requiring both parties to a derivatives trade to report a variety of data to a trade repository, and also requires end users to report intragroup transactions (i.e., trades between affiliates within a corporate group). For many corporate end users, these requirements have been the most challenging global compliance burdens to administer, in stark comparison with many other jurisdictions’ “single-sided reporting” approach to achieving the transparency goals underlying global derivatives regulation. Thus, end users cheered news of the recommendations, which came following significant feedback to policymakers from the European Association of Corporate Treasurers and the Coalition for Derivatives End Users.
Chatham, as the largest third party reporter globally of OTC derivatives, has long advocated that (see Chatham’s EMIR Review Response) corporate end users should not be subject to reporting burdens. Our feedback emphasized a straightforward principle for regulating end-user OTC derivatives activity: “[P]olicy makers should consider instances in which end users are unnecessarily burdened, especially in ways that are insufficiently additive to the objectives of EMIR.” Pursuant to that principle, we recommended, among other things, that dual-sided reporting be eliminated for both NFC-s and smaller financial counterparties (FCs) and that intragroup reporting requirements be eliminated for NFC-s. The EC’s recommendations would address these concerns with respect to NFC-s. They thus represent a significant step toward reducing burdens for entities that use derivatives for risk management purposes and do so in quantities that are not systemically significant.
In addition to these reporting-related proposals, the EC proposed other changes of note:
• End-User Hedging: Following a 2015 report by the European Securities and Markets Authority (ESMA), corporate end users became concerned that their hedging transactions might influence whether they were subject to clearing requirements. However, the EC recommended that hedging transactions not be counted against the clearing threshold. Thus, a non-financial counterparty that exclusively uses derivatives for hedging purposes would not be subject to clearing requirements under the proposal. Additionally, the EC proposed that if an entity exceeds the clearing threshold in one asset class (e.g., commodities), it need not be subject to clearing requirements in other asset classes (e.g., interest rates).
• Reporting of Historical Trades: The EC proposes to relieve counterparties from the obligation to report historic data (i.e., backloading). Specifically, transactions that were not outstanding on the starting date of the reporting obligation on February 12, 2014, would no longer be required to be reported under the proposal.
• Financial Counterparty Clearing: Financial counterparties whose transaction activity falls below a clearing threshold (set at a level equivalent to current thresholds for non-financial counterparties) would no longer be subject the clearing obligation. However, such entities would remain subject to bilateral margin rules.
• Expansion of Clearing Obligation for Certain Entities: The EC proposes to expand the clearing obligation to include entities it believes to be financial. Specifically, the proposal would amend the financial counterparty definition to include alternative investment funds registered under national law, Central Securities Depositories, and Securitization Special Purpose Entities.
• Pension Fund Clearing Delay: The EC proposes to further delay clearing requirements for pension scheme arrangements. The delay would be effective for three years and could be extended for an additional two years.
While it seems likely that these recommendations will be adopted, it is worth noting that these proposals represent only the first step in a multi-step journey to adopting the changes. Attention now turns to European Parliament and the European member states to negotiate over the recommendations. Assuming these embrace the EC’s recommendations, adoption and implementation likely would not come prior to 2018. Unless and until these bodies adopt the changes, market participants remain subject to all current EMIR obligations, and we recommend that they continue to mitigate any gaps in compliance. In the interim, Chatham will continue to represent its clients’ best interests, both in supporting compliance efforts and advocating for more efficient regulation globally.
• European Commission press release announcing proposed changes to EMIR
• Full text of European Commission recommendations
• European Commission Q&A on the proposed changes
• Additional details related to the proposal (e.g., impact assessment, speech by the EC, consultation documents)