ESMA invited comments on the technical standards for reporting under article 9 of EMIR. I sense that amongst corporate practitioners there is a profound sense of weariness – a weariness borne not just out of the volume of work created for them but also the sheer frustration of dealing with the uncertainties and inconsistencies that dog the implementation of at least the trade reporting aspects of EMIR.

That volume of work is incidentally (and in my view) contributing neither to the greater good of treasurers, their employing organisations nor I suspect regulators.

But the EACT does not allow itself to become weary and in our response to ESMA we make two fundamental points: that there should be sufficient lead time to implement future changes in reporting requirements; and that reporting should be focused on areas of increased inherent risk and exclude transactions that are not systemically risky.

On the first point we highlight the problems caused by the rule changes and adaptations that are still being made. We argue for a stop to future large scale reporting changes, for proper time to allow trade repositories to test enhancements etc. We also stress that new reporting requirements should apply only to new transactions and not to those previously reported but not reconciled.

For the second point we return to the core issue of the need for an EU wide exemption of intragroup transactions and for clarification of the scope of an FX derivative to exclude FX contracts used for commercial/hedging purposes by corporates.

The elephant in the room here is of course the question as to whether the panoply of derivatives regulation as applied to corporates (ESMA’s non-financial counterparties) is actually contributing to a reduction in systemic risk linked to the financial sector. Since the beginning of the regulatory tsunami in 2009 I have argued that the proposals for derivatives were fundamentally misguided to the extent that civil servants, politicians and regulators believed that the corporate sector is a real source of systemic risk.

All of which brings us to EMIR v2. I’m sure there will eventually be an EMIR v2 even though it is already behind schedule. The EACT’s shopping list will include the exclusion of intragroup transactions, a switch to one-sided reporting and above all a better coordinated and consistent global approach. One can only dream.


The vote in ECON, in effect rejecting ESMA’s rule drafting for EMIR, is still puzzling many of us. We began with a scratching of heads – from where had come this rather belated push by ECON to protect the interests of the real economy in derivatives regulation?

One cynical answer that has been volunteered to me is that it was primarily a result of aggressive lobbying by ISDA and AFME – the usual suspects, some would add, and not the sort of company that the real economy naturally welcomes or feels comfortable with. And in the next breath the energy companies are mentioned.

That the energy companies have been lobbying hard should not surprise us. These are the companies most affected by the single most egregious piece of drafting by ESMA, which removes the exemption from clearing once a single asset class threshold has been breached. The politicians and lawyers can be left to decide whether in doing so ESMA exceeded its mandate in the Level I legislation. But the asset class breach rule is the one area with which we should be really concerned and grateful to ECON for their resolution.

The next puzzle is over where we go next. There are two stages here. Firstly, we need to see whether Parliament votes through the resolution; we will have the answer on this by tomorrow afternoon. The second stage – assuming that there is sufficient support for the resolution – is described to me by old Brussels hands as ‘uncharted territory’. So no easy signposts there.

The stance of the EACT is becoming clearer:
– we think that ECON has raised real concerns, especially so with the asset class breach rule
– but we have no interest in seeing the whole fabric of ESMA’s rules being put back into the melting pot
– implementation delay, whilst bad for global regulatory progress, may be seen as less bad given the lack of proper preparation for implementation

If we can help Brussels unscramble its somewhat unfortunate mess we would be happy to do so! But first of all let’s see what happens in Parliament tomorrow.

I blogged previously on the challenge from ECON in the European Parliament to the detailed rules drafted by ESMA for the implementation of EMIR. Since then a huge number of emails and draft documents have flown around; it’s a real struggle to keep track of who is trying to achieve what – quite apart from speculating as to what might be the outcome.

Maybe it’s time for some home truths. As an amateur observer of the Brussels scene but one with a commitment to fight the corner for the ‘real economy’ in highlighting short-sighted financial regulatory proposals, I note the following:

1 – There is a significant element of ‘politics’ in this, even if the motivation is I believe largely non-partisan. I’m told that members of ECON are determined to flex their muscles vis-à-vis ESMA and therefore the Commission.

2 – However the MEPs have done their homework and should be credited with this. They argue through the amendments that ESMA has gone beyond its authority from the Level 1 content of EMIR. The chair of ESMA, Steven Maijoor, vigorously denies this in a letter he wrote on 28 January to the chair of ECON, Sharon Bowles – insisting that the drafting for which he is responsible is ‘in line with the Level 1 text’.

3 – Maijoor’s letter (equally vigorously) insists that there is a coherence and balance within the ESMA rules as they impact non-financial counterparties; so his challenge back to the MEPs seems to be that if you reject one rule (such as the use of gross rather than net positions) you are putting back into play all the other rules – the equilibrium will have been upset.

From the standpoint of non-financial counterparties does this spat between European institutions – if that is what it really is – matter greatly?

I would argue that the answer may be largely no – it matters not greatly.

There is one exception to this and that is with the rule on asset class breaches. We and others argued from the outset that it would unhelpful to have the clearing obligation triggered across all asset classes in the event of a single class breach. ESMA disregarded this and wrote the rules in such a way that one breach puts all the entity’s transactions into clearing. The ECON amendments include the challenge that this is in breach of Level 1. Maijoor’s letter to Bowles rejects the challenge, insisting that the approach is consistent with Article 10(3) of EMIR.

The less than veiled threat within Maijoor’s letter is that non-financial counterparties will be worse off (through more restrictive rules) if the coherence and balance of what ESMA has drafted is upset through Parliament’s rejection of the detail.

This should be of concern. But it has to be said that for the great majority of non-financial counterparties such a change would be largely irrelevant. The good news is that ESMA’s drafting – and the content of EMIR – allows for sensible recognition of legitimate hedging (risk mitigation) by corporates and excludes such transactions from the clearing obligation. So long as that fundamental approach remains intact, which it surely must do, non-financial counterparties should be relatively relaxed.

The exception to this relatively relaxed view of the current shenanigans between ECON and ESMA is of course the group of corporates with a combination of conventional treasury risk mitigation and of trading activities (the energy companies, most obviously). For them the asset class breach rules become much more relevant and for that reason if for no other I continue to believe that this is the single ‘hot’ issue in the current debate.

A Reuters story today by Huw Jones is fascinating as much for what it does not say as for what it does. In essence what is being reported is that the European Parliament may be preparing to reject some of the EMIR rule-making by ESMA. The story revolves around the interests of the real economy and the effectiveness of the exemption under EMIR from central clearing. There are references to fuel hedging by airlines, to there being a view within the Parliament that the clearing thresholds have been set too low and to the single asset class breach triggering clearing for all asset classes.

Some of us started to argue over three years ago that there should be an exemption for the real economy from the proposed regulatory approach on derivatives; at the beginning of the campaign we were opposed by every institution from the CFTC in Washington to the Commission and Parliament in Brussels. Whilst I will always be the first to recognise that the latter two were – to their credit – eventually prepared to listen and to change their positions, a huge amount of time and energy was spent to get us where we are today.

With the key exception of the asset class breach rules I consider the outcome in EMIR and the rule-making by ESMA to be essentially sensible and reasonable. I have no idea who is leading this initiative in Parliament – and the Reuters sources are of course anonymous. It would be mealy-mouthed to respond with a sigh, suggesting nonetheless that better late than never can still apply; but it would have been so much better if the EU institutions as a whole had been as sensitive to the interests of the real economy when they started to develop the original EMIR proposals.

We are where we are and I for one would rather that we could now move on to focus our energies on the various other financial regulatory initiatives that have implications for the real economy. Were it not for the continuing concern over the asset class breach rules I would consider debate over the arithmetic level of the clearing thresholds to be of academic interest only. Legitimate risk mitigation through derivatives was never intended to be caught and counted against any clearing threshold. But the issues around asset class breaches do complicate things and it would have been so much better if ESMA had been able to take on board the concerns expressed to them.

We’ll have to watch Parliament carefully, not least because the real economy seems to have some unexpected friends there. So what Reuters reports is probably good news even if its substance will surely mean that the whole implementation process of EMIR is even more protracted.

On the train to Paris to visit ESMA on Monday I drafted my own short list of the areas within EMIR (regulation of derivatives) where it is self-evident that the real economy needs help in understanding with what companies should be compliant in their use of derivatives. But what I have just written ought to read ‘….should have been compliant since 16 August 2012’ (see previous blog, ‘Derivatives regulation: is the real economy ready for implementation?’).

My list included:
– monitoring and complying with the principles of the exemption and clearing threshold;
– collateral exchange requirements;
– confirmation procedures;
– portfolio reconciliation procedures; and
– trade reporting requirements.

….and all of the above to be assimilated in the context of various deadlines for the implementation process.

I found the attitude at ESMA constructive and realistic. The pressures on the team are self-evident but I wasn’t filled with despair at the prospect of implementation being derailed by the sheer volume and complexity of the task.

So we talked about practicalities – and I know that such conversations are being repeated with many other representative bodies. ESMA sensibly looks to national regulators to carry on national dialogues, as we know, but is keen to have good links with organisations such as the EACT that can take a European wide view.

There is a real opportunity and need for the EACT to help the treasurers in its member associations by ensuring that there is clear advice on how to comply with EMIR. We won’t attempt to duplicate the output of ESMA, concentrating instead on providing input to the drafting by ESMA when appropriate and communicating through our own channels to draw attention to the guidance that is available.

Now for some good and some less good news. First the good. Not the least because the trade repositories are not yet in place to handle reporting under EMIR, there is no immediate requirement to comply with what EMIR demands in terms of trade reporting. I encourage everyone to look at Annex VII, Article 5 of ESMA’s RTS (draft technical standards) – you can access the document here. There are various dates specified by which trade reporting will get underway, with 1 July 2015 defined as the starting point for ESMA to receive the reports in the absence of a trade repository (presumably ESMA will be doing its best to ensure that the repositories are indeed all in place before that date looms).

And the bad news? In the meeting with ESMA we asked the question as to how derivative contracts outstanding at the commencement of EMIR – i.e. 16 August 2012 – but not outstanding at the point trade reporting kicks in should be treated. The somewhat bizarre answer is that all such contracts should still be reported within the timeframes specified!

I’m in no doubt that regulators will defend such a requirement but – if you start from my deeply sceptical position over the underlying relevance of any of this to reducing global financial systemic risk – you have to wonder what on earth will happen to all such historic data.

Finally – and following up on a reference in my previous blog – the format for reporting trade information is specified in Annex VI.I, Article 1, of the RTS. Happy reading.

Very interesting developments in the long-running saga of the Basel III implementation within the EU – our old friends CRD IV and CRR. The EACT and many corporates have been arguing that it is illogical and unhelpful to allow CRD IV/CRR to override economically the value of the corporate exemption under EMIR. The issue is specifically over the application of CVA, which in layman terms means how much additional margin is charged on uncleared bilateral OTC derivative contracts, to allow for the higher capital requirements proposed under Basel III and CRD IV/CRR.

When we started to argue that the EU should modify its implementation of Basel III we received essentially the same response that we had faced when we first started lobbying on the derivative regulations. That amounted to a polite (or on occasions, slightly less than polite) suggestion that we take our ball and go away and play elsewhere, as we were wasting our own and everyone else’s time. Naïvely or not we and others have persevered on both issues.

From the outset our argument on CRD IV/CRR has been that there should be a read-across exemption from CVA for EMIR exempt contracts – the economic effect of which would be to make it no more disadvantageous to benefit from the exemption. The first success was to obtain the support of ECON within the European Parliament. Since then the work on the proposals more or less disappeared into the mire that is officially described as ‘trialogue’; the latter is a process that often seems either extremely high-minded and democratic but sometimes looks to outsiders as crude nationalistic horse-trading at European level.

What I have been hearing in the last couple of days is that under the Cypriot presidency we are making real progress to obtain the read-across exemption for which we have been arguing. This is extremely good news for the real economy, even if there is a sting in the tail. That sting arises because the current proposal by Cyprus is to define the exemption in terms of whether or not the underlying transactions qualify for hedge accounting. In other words, the corporate would not be able to rely on the wider (and more sensible) approach under EMIR; that approach uses the test of whether a transaction is “objectively measurable as reducing risk”.

This is somewhat frustrating to see hedge accounting being brought back onto the table. On EMIR we had to argue early in the process that hedge accounting should not be the necessary condition for an exemption. Quite simply, this would be a nonsense for two reasons: firstly, there are sound risk mitigation reasons why on occasion companies will not be able to use hedge accounting; and secondly, it is inappropriate to base a regulation on transitory accounting standards.

On the assumption that what I have been hearing is indeed correct – and all the signs suggest that it is – we in the EACT will now vigorously pursue a campaign to confirm the read-across exemption and, most importantly, to explain why it is vital to remove the hedge accounting test.

ESMA has been consulting since June on ‘draft technical standards’ on regulation of OTC derivatives, CCPs and trade repositories. Dry it may sound but this is of course the crucial ‘rule-making’ stage of the implementation of EMIR, the European Union’s regulation addressing OTC derivatives in the post-crisis (2008 version) aftermath.

The position we have taken in the EACT is well documented and the exemption won for non-financial end users has provided a breathing space for the use of derivatives in corporate risk management, even if this may not be the long-term solution in the commitment to reduce global financial systemic risk (see blog “Financial regulation: winning the battle and the war; but what about the future?”, 16 July 2012).

ESMA’s consultation has raised more issues than I suspected it would. Our response can be downloaded here and it might be helpful to summarise the key issues:

➢ The corporate exemption is based around contracts that are ‘objectively measurable as reducing risks’ and includes the words ‘in the ordinary course of….business’. We would like to see these latter words deleted if at all possible. We are also arguing against the explicit exclusion of hedging contracts associated with stock option plans

➢ Clearing thresholds are central to the operation of the end-user exemption and we identify issues in ESMA’s drafting around the treatment of intra-group transactions and (more fundamentally) the absence of clear alignment between actual and developing proposals in the US and from BCBS/IOSCO (who have a global remit)

➢ The administration requirements defined by ESMA, in the context of what the organisation refers to as ‘risk mitigation techniques’, are seen by us as posing excessive burdens on all non-financial end users but especially on SMEs

➢ Finally (and most crucially) there appears to be a requirement emerging in ESMA’s detailed proposals for all market participants to report daily mark-to-market values to a trade repository. As we say in our response to ESMA, we can see no possible regulatory justification for this and can identify serious administrative implications for large as well as small companies

My overall feeling after drafting our ESMA response? It is that despite all our efforts over EMIR there is still a huge challenge in persuading European authorities that non-financial end users are totally different from the financial sector participants with whom regulators are much more familiar.

So we see a continuing inability on the part of the EU bodies to recognise two things in particular: that the non-financial companies we are discussing do not and have not in the past directly driven financial sector systemic risk; and that the resources, especially IT systems, available to these companies are simply not on a sufficient scale to handle regulatory requirements drafted from the perspective of the financial sector.

The consequences of the first point above are reflected in issues such as the perverse view being taken of hedging of company stock options and the requirement for daily mark-to-market reporting. The second point is reflected in the unreasonable administrative burden being imposed in respect of information that will do nothing to help regulators reduce systemic risk and support the stability of the financial system – which is what they should be doing.