Moving towards a Council compromise on EMIR?

May 15, 2011

In my previous blog (Derivatives: doomsday scenario for end-users?) I suggested how the EMIR and Dodd-Frank processes could still produce an outcome that would be less than satisfactory for non-financial end-users.  In essence my ‘think the unthinkable’ scenario is that Washington and Brussels, faced with the unresolved issues surrounding the nature and practical working of the exemption for these end-users, default to a solution that limits the exemption to one based on the exclusion of FX swaps only.  Over the last week the strongest reaction I can claim to have received was a suggestion that within Brussels the scenario might have surfaced in some of the institutional thinking there.

Others have pointed out that in my litany of the areas of uncertainty I had neglected to refer to CRD IV and Basel III.  True.  I think I am personally starting to suffer from Basel III fatigue syndrome, coupled with intellectual laziness.  But that is not to say that the ‘win the battle but lose the war’ fear has gone away in any sense at all.

The major focus of the EACT, working with a number of large companies across Europe, is now on trying to improve the drafting of EMIR in the areas where the interests of the real economy are still at risk.  We aim to make input to the Hungarian Presidency’s ‘compromise text’, the latest version of which is available here.

The issues remain as I have previously described them: the production of a satisfactory definition of hedging to form the ground stone of the exemption; the treatment of intra-group transactions; the practical definition of time intervals to apply for the clearing obligation to be imposed – and lifted; and the circumstances in which exiting contracts could be forced into clearing if the threshold has been breached (the issue of ‘backloading’).

And over and above those issues we would strongly wish that the economic benefit of an exemption under EMIR for the real economy should not be undermined by other financial legislation, in particular in connection with MiFID and CRD IV (Basel III).

As seems to have been the case throughout the debate over EMIR (and before that acronym emerged), a key is the need to have as much consistency as possible in the positions being taken by regulators and finance ministries in France, Germany and the UK.  With 27 member states in the EU, these three are widely described as ‘the only ones that matter’ in this and other debates.  The encouragement we are hearing is to do our best to harmonise those positions through active intervention by the three country’s representatives in the discussions within Brussels.

The next few weeks will show whether all the above is as effective as we would wish.  A key date to watch now is 24 May, which remains on the table for the vote by the European Parliament’s ECON.  Many expect that this could be deferred – another indication perhaps of the wider uncertainty that still supports my doomsday scenario.

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