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European Parliament’s RTS Rejections Scrapped

Alice Attwood reports on the latest developments in the
implementation of EMIR rules.

At the beginning of February the European Parliament’s
Economic and Monetary Affairs Committee (Econ) voted
to reject two of the Regulatory Technical Standards
(RTS) produced by the European Securities and Markets
Authority (ESMA) under European Markets Infrastructure
Regulation (EMIR). The rejection was overturned two days later,
causing a split between commentators some of whom suggest the
outcome negates the chance of further delays to implementation,
while others remain cautious and expect EMIR’s deployment to
suffer further delays in order to ensure its appropriateness.

Econ initially rejected two of ESMA’s RTS rules by 24 votes to
20 in a vote on 4 February. The RTS rules in question cover the
clearing threshold for non-financial counterparties, especially the
condition which states that if the clearing threshold for one asset
class was exceeded by a counterparty, the counterparty would be
automatically held to have exceeded the threshold for all asset
classes; as well as requirements over timely confirmations, with
particular attention on how this obligation would affect smaller,
non-financial counterparties.

The technical standards were first published by ESMA in
September and were approved by the European Commission (EC)

in December, although the rules have attracted some critics’
attention over suggestions that the rulings differ from the original
document.

However, later that week, Parliament withdrew and cancelled
its rejection vote and allowed RTS to go ahead as planned and
without edits. On 7 February, Sharon Bowles, chair of the Econ
committee, declared that it would agree to a phasing-in of the
proposed RTS rules for non-financial firms over an ‘appropriate
period of time’. Bowles also gave assurances that Parliament’s
concerns over the particular RTS aspects would be responded to
in a stream of Q&A booklets, covering legal areas of uncertainty.

Fallout

Another rejection would have seen the rules sent back to
ESMA for redrafting, therefore delaying the implementation of
EMIR. By delaying the new regulations, there was the risk that
some politicians may accept less-than-appropriate standards in
order to combat further delays, allowing and driving
implementation sooner.

David Clark, chair of the Wholesale Markets Brokers’

Association (WMBA), explains the story so far, “The delay in
EMIR comes from the withdrawal by Econ of the resolution on
technical standards. This reflects political positioning between the
European Parliament and the Commission about level two
procedures and the technical and detailed difficulties of
implementing complex legislation. From the markets’
perspective, it is better to have delay than badly drafted or
implemented regulation, and further delays should not be ruled
out.”

While the latest developments seem to indicate that such delays
are not on the horizon, there remain some who are hesitant to say
that they expect implementation to take place when currently
planned, mainly due to the imperative of the rules’
appropriateness for the market.

Zohar Hod, global head of sales at SuperDerivatives, agrees
with Clark’s notion, stating that a delay would be preferable to a
set of rules that are not appropriate for the market. He says, “It is
absolutely imperative that Econ take the time they need to iron
out any imperfections in the new set of rules – the committee
must stand up to the policymakers and take bold action if it is
required. Another delay is frustrating and will cause concern to
market participants looking for clarity around the rules, but is
preferable to rushing through a cobbled-together set of rules.”

Head of regulation, Marketplaces at Thomson Reuters, Robin
Poynder, explains that the about-turn by Econ will have little
effect on any further delays. “In the lead up to the vote on EMIR
Regulatory Technical Standards it seemed that we would be
seeing implementation delays due to some elements of these
particular rules, particularly those that focus on the obligations on
non-financial counterparties.

“The positive news is that Parliament has now backed away
from objecting to the RTS and so we are back on schedule – this
is what the market is waiting for. The formal non-objection
should be made by 19 February and then the RTS can be
published in the Official Journal, expected to be around 1st
March, with the rule coming into force 20 days later. Once these
come into effect, they will trigger other aspects, for example
central counterparties can begin applying for authorisation,”
explains Poynder.

What’s Next?

In a statement from the EC, the body says that the RTS in
question should be strictly based on the ESMA drafts, and notes
that development of these rules is new for all involved in the
creation of them. It pledges to work with Parliament to ensure
“an open dialogue and transparency about our planning for
forthcoming technical standards and ensure that Parliament has
enough time, in the framework of the relevant inter-institutional
agreement, to assess them.”

The regulations will now come into effect 20 days after their
publication in the Official Journal, expected to be mid-March this
year, as indicated by EU Commissioner Michel Barnier.

Therefore the flurry of voting activity over these particular RTS
articles may have ultimately had little effect on EMIR’s
implementation schedule.

EMIR’s first obligations, which cover credit and interest rate
derivatives are expected to be implemented from July this year,
with the remaining objectives set to be phased in periodically up
to the summer of 2014 when EMIR is expected to be fully in
place.

Hod says that post-implementation, the costs of compliance to
the new rules could cause wider market effects, “EMIR is a vast,
sweeping piece of regulation that will force most standardised
OTC derivatives through clearing houses. This has huge cost and
time implications on all market participants, but could
particularly impact corporates if they are required to comply. It
will make a huge range of hedging strategies too expensive and
complicated to carry out, leaving them exposed to potentially
catastrophic real-world risks such as currency fluctuations and
commodity prices.”

Poynder adds another dimension to discussions, stating that
perhaps regulators and industry participants alike, should be
concerned about who is creating the directives they will have to
adhere to. He tells Profit & Loss, “The objection by parliament
came as they maintained that the proposed rules did not fully
reflect the original guidance and request from parliament. As
background, there is a feeling within parliament that the balance
of control within the legislative process has moved too far
towards the commission and one could interpret this move as
Parliament making a stand. This undercurrent is taking place
‘behind the scenes’ of the new regulations and it will be
interesting to see how it develops and to what extent future
regulations such as MiFID will be affected.”

Later This Year

EMIR has been referred to as the European equivalent of the
US Dodd-Frank Wall Street Reform and Consumer Protection
Act, although according to current drafting, it is possible that
companies participating in both markets may be required to
report trades, for example, to both regulators. However, in an
attempt to reduce the chance of this happening and to avoid
extensive regulatory costs for participants, regulators from the
EU and US are set to meet during the first half of this year, to
advise that EMIR should be accepted as being as strict as its US
equivalent. This would then see regulators accept that those
complying with Dodd-Frank or EMIR in one jurisdiction would
be compliant in another.

Market attention will remain on Econ and ESMA in the
coming months as the industry waits for the details of the new
directives, Hod warns, adding, “As we have been saying for
years, any new piece of OTC regulation must not force
corporates into a position whereby they cannot use the hedging
strategies they need to offset the risks faced by their business.

be deterred from hedging their exposures but will also need to
take on more basis risk if they do go about their hedging
operation,” he adds. “Risk is never eliminated, it’s only
transferred and this means that the regulations will not
achieve their desired goal of lowering risk and increasing
transparency.”

Poynder agrees, telling Profit & Loss that the focus must now
be on preparing for a new regulatory landscape, “It is worth
emphasising that market participants always wish to operate
within regulation and will prepare for approaching regulations
when they can – Basel III balance sheet restructuring being a
prime example of this. The market requires clarity and wants
greater safety and understanding in terms of what each company
needs to do in order to be compliant – so that they can prepare.
The challenge remains that if there is not total clarity, the
process of working towards compliance becomes very expensive
and time consuming.”

Paul Gogliormella

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