EMIR rolls on – hopefully in the right direction

February 13, 2011

At the EACT we remain very actively involved in working to achieve an outcome that protects the ability of non-financial end-users – ie corporates – to use over-the-counter derivatives without being required to go into central clearing and indeed use standardised products.  The key adverse consequences (which we’ve highlighted from the outset) of the regulatory proposals as they emerged around the middle of 2009 were the requirement to post cash collateral in connection with central clearing and the linked consequential reduction in the use of derivatives to hedge business risks.

The position we are at now is the regulation (referred to by the acronym EMIR) is passing through co-decision in Parliament and Council.  I summarise below the timetable in Brussels but firstly it might be helpful to note the shape of EMIR as it is emerging from a huge amount of debate both publicly and privately.  The key points are:

– the initial concept of two thresholds looks likely to change and we will be left with a clearing threshold only – this is a simplification that we support

– the recognition that derivatives are essentially used by corporates to mitigate ‘risks directly relating to [the ] commercial activity’ is now embedded in the drafting and forms the basis for the exemption of contracts from central clearing – provided the corporate does not breach the ‘clearing threshold’

– the definition of the clearing threshold remains opaque and may be subject to further scrutiny in co-decision; after that it will be included in the rule-making work of the new securities regulatory body, ESMA (which has a key role in EMIR’s implementation)

– it appears likely that the principle there should be no retroactive application of the clearing obligation once a corporate crosses the clearing threshold will be accepted (but this remains a key issue so long as there is no certainty on the outcome).  The most favourable and right outcome here is that all contracts outstanding at the date of a clearing threshold breach remain outside clearing

– there is however a suggestion (in the latest set of amendments emerging from the Council working group discussion) that if the clearing threshold is breached then all contracts – including those that would previously have been excluded if they are mitigating commercial risk – will be required to go into clearing.  This is not good news

– it is self-evident that we as the EACT and  corporates in general should be seeking to work closely with ESMA as it tackles the detailed work of implementation

– pension funds may well still be caught within the scope of EMIR in respect of their use of derivatives, for interest rate and longevity risk in particular; this is not a good  outcome for corporates in those countries where pension funds are effectively underwritten by and a financial commitment of the sponsoring corporate

– convergence with the US (the Dodd-Frank Act) is still absolutely on the EU’s agenda.  This commitment – and the faster timetable for Dodd-Frank and the CFTC/SEC rule-making, even if delayed – drives an area of further uncertainty for EMIR.  The latest signs from the CFTC however do suggest that the position of corporate end-users is being seen with increasing sympathy

As part of the work of Parliament in the co-decision process the ECON Committee is due to vote on its ‘opinion report’ on EMIR.  The key dates in the run-up to that are:

28 February: second presentation of draft report (including translation)

15 March: deadline for amendments [originally planned for 15 February]

20 April: vote in ECON [originally planned for 22 March]

June 2011: vote in plenary

For the work we are doing as the EACT – with support from a number of corporates across Europe – it is most important that we focus on a limited number of amendment proposals and work with key MEPs on ECON to seek to have these adopted.  This will be our focus over the next weeks.

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