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05 August 2012

Final ISDA-AFME-BBA-Assosim submission to ESMA re EMIR draft RTS on OTC, CCP, TR


The signatory associations would like to underline that they support the key aims underpinning EMIR, in particular reduction of counterparty credit risk through clearing and compression, increasing regulatory transparency through trade repositories, and enhanced credit risk mitigation.

The associations welcome the fact that the European Supervisory Authorities (ESAs) have been willing to consult publicly on the mandated technical standards under EMIR a second time. While they believe that longer consultation periods, allowing further consideration of input to regulators, create optimal conditions for sound regulation, they recognise that the tight timeframes to which the ESAs must adhere in drafting these standards are not of their making.

The associations underline again that derivatives business is the most global of financial businesses, and urge the European Supervisory Authorities and the European Commission to focus on creation of a regulatory regime in Europe that is both coherent and convergent, in terms of its interaction with other regimes. They believe the G20 commitment to avoid protectionism, fragmentation and regulatory arbitrage is as important as any other. Failure in this regard will affect investment and employment globally, as the cost of risk management increases prohibitively.

It is important, in this context, that sufficient emphasis is placed not only on interaction of the European regulatory regime with the United States’ regulatory regime, but also with other regulatory regimes within the G20 group. The signatory associations welcome the ESMA interpretation that an ‘equivalent’ level of protection under EMIR RTS for indirect clients does not mean availability of the same protective structures particular to the CCP-clearing member-client relationship but that, rather, these structures should be replicated for indirect clients at the level of the clearing member (and not necessarily at the CCP level). However, the relatively inflexible approach as set out in the draft RTS (particularly in relation to individual segregated protections) poses significant problems for firms seeking to offer either direct or indirect clearing services. The apparent obligation on a clearing member to offer indirect clearing if offering any clearing services, for example, is likely to decrease competition in clearing services and disincentivise clearing membership.

Other concerns relate to the legal complexity – inadequately addressed in EMIR and not sufficiently recognised in the draft RTS, we believe – faced by firms offering indirect clearing services associated with segregation and portability protections for indirect clients under the prospective regime. They encourage recognition of a more flexible methodology for meeting the principles-based requirements of indirect clearing as set out in the EMIR text. They are also concerned that the draft RTS does not take into account the apparent difficulties in applying its requirements in the context of clearing members at 3rd country CCPs. They fear that there may not be enough time for all participants in the clearing chain to work through these issues under the current compliance timetable, if these provisions remain as in the current draft.

The associations are particularly concerned about the international application of the requirements for indirect clearing set out in the proposed RTS to the extent that they conflict with, or come into conflict with, local regulation for financial intermediaries in jurisdictions outside the EU. This has crystallised as a clear issue for US FCMs where the ability of US FCMs to comply with the requirements for indirect clearing set out in the proposed RTS is uncertain. For indirect clearing, we do not currently believe that FCMs would be able to offer the requisite end-client protections as a result of the legal regime applicable to them in the US. On the other hand, FCMs (or other non-EU CMs as the case may be) will not have the option of offering direct client services across the EU because of local regulatory licensing requirements in many European jurisdictions. They do not see an obvious solution to address these concerns on the basis of the current proposals and the Level 1 text.

The associations believe further clarity is needed as to whether or not the clearing obligation for certain classes of OTC derivatives is triggered only by the granting of authorisation to CCPs under EMIR, and not by CCPs already authorised under existing national law, or by the submission of an application for authorisation. Either scenario is associated with considerable legal uncertainty, but this uncertainty is further heightened if it is not clear which scenario triggers the clearing obligation.

In relation to the clearing obligation they believe that further clarity is needed on the treatment of FX contracts, and in particular seek reassurance that international convergence will be achieved.

Full paper



© ISDA - International Swaps and Derivatives Association


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