04 December 2015

EuropeanIssuers’ concerns over ESMA’s recommendations on the use of OTC derivatives by non-financial companies

EuropeanIssuers disagrees with ESMA’s proposal to assess the systemic importance of non-financial companies (NFC) irrespective of the hedging/non-hedging nature of their trades.  EuropeanIssuers therefore encourages the EC to uphold the existing hedging exemption. Otherwise, European companies would be obliged to clear their derivatives centrally or to collateralise bilaterally. This would increase the costs of hedging transactions and impact NFC ability to manage their risks. This would have a possibly significant effect on their operational activities and result in more restricted investment capacity of those companies due to collateral obligations. Implementing ESMA’s recommendations would therefore have a negative impact on growth and jobs and run counter to the objectives of the Capital Markets Union.

EuropeanIssuers’ disagrees with ESMA’s recommendations for the following reasons:

- Hedging derivatives are of strategic importance for non-financial companies, irrespective of their size, and do not endanger the resilience of the financial system. This is acknowledged not only under EMIR, but also within the MiFID II/MiFIR and the revised CRD/CRR frameworks through specific exemptions. It is important to ensure regulatory consistency.

- ESMA’s approach would distort the global level playing field, especially comparing with the U.S., where clearing thresholds are larger than in the EU, and hedges remain exempt.

- Contrary to ESMA’s opinion, large European companies are capable of classifying their hedging activity and have already developed complete policies, procedures and systems aimed at properly characterizing trades for the different obligations set out in the regulation across their organization, which was a considerable investment.

- ESMA argues that it is difficult to control and supervise the correct application of the threshold criteria. However, the national competent authorities are in charge of the market oversight and therefore EuropeanIssuers understands it is rather an issue of proper enforcement. EuropeanIssuers understands that the supervisory processes monitoring non-financial companies’ compliance with the clearing thresholds are already successfully implemented in several Member States. Sharing best practices would be useful.

- If any mismatch exists between evidence from the threshold monitoring and from reporting to trade repositories, it should be managed on a case by case basis. This does not imply that the process of monitoring currently in place is not effective. EuropeanIssuers understands it does allow to identify companies that are not declared as NFC+ despite the fact that they fall in this category.

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