The Paris-based European Securities and Markets Authority (ESMA) has published four documents concerning Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR). Three of these documents are required of the supervisory authority under Article 85 EMIR. The fourth document is submitted to the European Commission in response to the executive’s consultation paper of 21 May 2015.

The documents contain several controversial recommendations to the Commission on changes to EMIR. These include:

  • re-classify so-called “quasi-financials” (excluded alternative investment funds, securitisation vehicles);
  • assess systemic relevance of non-financial counterparties (NFCs) on basis of gross notional value per class regardless of hedge/non-hedge distinction;
  • amend the Article 39 EMIR regime on segregation and portability for client assets;
  • simplify the Clearing Obligation procedure and remove frontloading requirements;
  • abandon the requirement to backload reports for transactions terminated before 12 February 2014; and
  • overhaul the third country central counterparty (CCP) equivalence procedure with ESMA to assess third country legal and supervisory arrangements.

The analysis on NFCs is quite the indictment of current rules and compliance, suggesting that 51% of NFC groups exceed a clearing threshold based on trade reports but have not notified ESMA under Article 10 EMIR. The analysis on CCP margining requirements concludes that while requirements have worked well additional rules in secondary legislation are required. ESMA’s response to the Commission’s consultation paper queries the requirement to report exchange-traded derivatives but stops short of recommending that this requirement be discarded.

The recommendations coincide with yesterday’s deadline for responses to the Commission’s consultation on the EMIR review. The Commission is not bound to propose changes to EMIR. However, ESMA presents a statistic-heavy case on NFC designations and its other recommendations chime with long-standing market concerns regarding frontloading, conflicting insolvency rules and regulatory equivalence for US derivatives clearing organizations. The Commission will prepare a report on consultation responses in Q4 2015. Any changes to the EMIR legislation would be subject to review and amendment by the Council of Ministers and the European Parliament.

View ESMA’s response to the European Commission EMIR review, 13 August 2015