Derivatives regulation: is the real economy ready for implementation?

November 11, 2012

As the derivatives regulatory bandwagon moves forward towards implementation it is unsurprising that the end users of derivatives – aka the real economy – should be encouraged to focus on what implementation of the new regulatory framework requires of them. Events with which I have been involved last Friday and will be tomorrow (12 November) have coincided to highlight for me that there are some significant issues to which treasurers should certainly be paying attention.

On Friday I was at a briefing session with HSBC, which included an excellent run-through of the EMIR background and brought home some of the uncertainties associated with its implementation. I won’t address here the detail of EMIR but simply mention two dates, one of which is in the past but merits some serious attention.

EMIR was passed into law on 16 August 2012. With effect from that date users of derivatives should be compliant with the regulation. There may already be some hollow laughs on the part of those reading this; whereas the large corporates will surely have been focusing on what EMIR means for them, it stretches reasonable credulity to suppose that companies that are not ‘large’ – and certainly the SME constituency – are well briefed on the implications of EMIR.

It’s of course fascinating that whilst EMIR is in legal force much of the practical details of the regulation remain to be confirmed. ESMA has produced its regulatory technical standards (RTS) but these are now being considered by the EU Commission and then have to pass through Parliament and Council. In broad terms this process should be finished by 31 March 2013. This might not matter were it not the case that there are some huge areas of detail included in the RTS that put the meat on the bones of what Brussels put into law back in August.

One could describe the current situation as akin to the EU having announced an entirely new sport and confirmed that, in order to win, a team must score more points. Some of the crucial details as to how one can score those points remain to be communicated.

So if you are a corporate end user and have stopped wringing your hands in despair, it might be worth noting that from 16 August 2012 you should have been in a position to report the copious detail that EMIR/ESMA requires on your derivative contracts to your trade repository. The fact that the trade repository does not exist is worth noting. HSBC stated that a draft format for trade repository reporting is available on the ESMA website (as I write I have not yet located the document).

It was clear from the Friday briefing that banking counterparties will be offering a trade reporting service to their corporate customers. There was some coyness on the part of HSBC as to what this might cost; it looks suspiciously like a vital service for which pricing control will clearly lie in the hands of the banks.

Oh and by the way, the contracts on which a corporate should have been reporting from 16 August 2012 are not just new contracts but also all those outstanding at that date.

The other date that might be worth noting is 1 July 2015. On that date if a trade repository (for the appropriate class of derivatives) is not in place in the relevant member state, then all the affected trades will be reported to ESMA. For those of us that have never been convinced about the systemic risk reduction benefits from real economy end users reporting their derivative trades, this raises the spectre of ESMA drowning in trade data for which the regulatory benefits are less than compelling.

Which brings me to what I am doing tomorrow, Monday. I’ll be in Paris for a meeting at ESMA, to discuss how the EACT can help raise end user awareness of the implications of EMIR. I’m greatly pleased that ESMA has suggested such a meeting, as it underlines that they recognise that the end users in which members of the EACT treasury associations work are completely unused to dealing with this type of financial regulation. This is of course even more the case with SMEs, as ESMA noted in setting up this meeting.

So I look forward to tomorrow’s meeting – and I’ll ask for help in identifying where the draft trading repository report format can be found.

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One Response to “Derivatives regulation: is the real economy ready for implementation?”

  1. Tom Riesack Says:

    Richard, thanks for your insight. In my advisor role I have talked to a number of corporate “end-users” and all are concerned about the points you mentioned. That is, all that are actually acutely aware of the dire situation they are steering towards…
    Might I ask you to give an update on your discussion with ESMA?

    Best, Tom


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