EMIR - 2013: The Year Of Implementation
One year ago, the relevant European institutions had agreed on the final text of EMIR, the regulation of OTC derivatives in Europe, and the various aspects of the regulation were explicit. European lawmakers called for a) mandatory clearing for all standard OTC derivatives; b) uniform collateral requirements (including initial margins) for non-centrally cleared contracts; and c) mandatory reporting for all contracts.
The stage had been set for a sea change in the world of OTC derivative contracts on the European continent. Despite having expressly outlined the legislation's major objectives, many questions remained unanswered. Specifically, many terms were vaguely defined, methods for implementation and enforcement remained unclear, and the legislation's exemptions were not made explicit. Needless to say, the Industry was waiting for much needed clarification from regulators before market participants were willing to invest significant resources into compliance.
The European Regulatory Challenge - Reaching Agreement Among 30 Parties
One year later, things are starting to move forward. One question begs to be answered, however. Why did it take so long?
As early as September 2009, the G20 summit convened in Pittsburgh and drafted the following commitment:
"All standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements."
It took more than one year from the time the G20 summit convened in Pittsburgh until the European Commission's (the executive body of the E.U.) issuance of a "proposal for a regulation on OTC derivatives, central counterparties and trade repositories" on September 15, 2010. When issued, the proposal was forty-nine pages long and divided into seventy-two articles. It was the result of a series of consultations with experts and working groups at the European level and within the 27 member states, and it defined a target framework for OTC derivatives clearing through Central Counterparties ("CCPs"), reporting to Trade Repositories ("TRs"), and risk mitigation (through an exchange of collateral between the parties to the contracts).
Two more years were necessary to arrive at a final draft. During the first year, from September 2010 to October 2011, both the European Parliamentwhich is the directly elected parliamentary institution of the European Unionand the European Councilwhich is comprised of 27 national ministersamended the draft proposal separately.
The Commission, the Parliament, and the Council spent much of the following year, from October 2011 to February 2012, reconciling the differing views of the various regulatory bodies. For instance, there were divergent opinions regarding the amount of power that should be ceded to ESMA, the rules for non-European CCPs, and the exemption terms for intra-group transactions. The resolution of these remaining issues led to the final proposed text of EMIR on February 9, 2012. It was subsequently adopted by the Parliament on March 29, 2012 and ratified by the Council on July 4, 2012. After a long legislative road, EMIR became law on August 16, 2012.
The Second ChallengeMeeting Industry Realities: The "Technical Standards"
A considerable amount of discretion was given to ESMA to develop Technical Standards in order to clarify EMIR's requirements and provide the Industry with an explanation of its obligations.
Over the course of eight months in 2012, ESMA solicited public comment from market participants and stakeholders (banks, asset managers, financial institutions, working groups, think tanks, etc.) through two successive consultations, in order to better define key terms and technical options.
With respect to OTC derivatives, the consultations addressed procedures for assessing the eligibility for mandatory clearing, "timely confirmations", and treatment of non-financial firms. The consultations also specified certain provisions relating to CCPs. Specifically, capital, retained earnings, reserves, and organizational requirements were all discussed by the participants. Lastly, the consultations helped clarify the content and formatting requirements for information reported to Trade Repositories.
After the consultations concluded, ESMA published the "Regulatory and Implementing Technical Standards" on September 27, 2012. This publication complemented EMIR and provided the framework for implementing the new regulatory regime. The European Commission adopted the Technical Standards on December 19, 2012. Following the approval of Parliament and Council, the Standards were published in the Official Journal on February 23, 2013. On March 15, 2013 the Technical Standards went into effect and EMIR was finalized.
With the publication of the Technical Standards, market participants could start tailoring their projects and action plans in order to comply with EMIR's requirements. After the long wait for the final EMIR language, the implementation challenge now becomes a race against time, and certainly the main regulatory project for banks and financial institutions in 2013.