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The proposal introduces more proportionate rules for corporates. It re-focusses the scope of the clearing obligation for financial counterparties to include some additional relevant market players while exempting the smallest financial counterparties. It also allows for more time to develop clearing solutions for pension funds. In addition, the Commission is streamlining the application of reporting requirements and making them more proportionate; it is also introducing improvements to ensure the quality of reported data. The changes include measures that could save market participants, and in particular corporates such as energy companies or manufacturers, up to €2.6 billion in operational costs and up to €6.9 billion in one-off costs.
Today, the Commission also adopted a Communication setting out its intentions to present further legislative proposals before the summer to address important and emerging challenges in derivatives clearing as its scale and importance grows. Further changes to EMIR will be necessary to ensure financial stability, as well as the safety and soundness of CCPs that are of systemic relevance for EU markets and to support the further development and deepening of the Capital Markets Union. In particular, the future proposal should seek to enhance the common EU supervisory arrangements for central counterparties (CCPs). In this context, specific arrangements based on objective criteria are necessary to ensure that that CCPs that play a key systemic role for EU financial markets are subject to the safeguards provided by the EU legal framework, including, where necessary, enhanced supervision at EU level and/or location requirements.
The main changes to EMIR
Reporting requirements:
Under the proposal, reporting requirements are being streamlined for all counterparties. This will considerably reduce the administrative burden, while ensuring that the quality of data needed for monitoring derivatives markets and identifying financial stability risks is not lost. In particular, derivative transactions concluded on exchanges (so-called 'exchange-traded derivatives') will now only be reported by the CCP on behalf of both counterparties. To reduce the burden for all non-financial counterparties (corporates), transactions concluded between companies belonging to the same group (so-called 'intragroup transactions') will not have to be reported any longer, if one of the counterparties is a non-financial company. To reduce the burden for small non-financial counterparties, transactions between a financial counterparty and a small non-financial counterparty will be reported by the financial counterparty on behalf of both counterparties. Reporting on historic transactions will no longer be required. In addition, the proposal aims to improve the quality of reported data.
Non-financial counterparties (NFCs):
Non-financial counterparties (corporates), use OTC derivatives to cover themselves against risks directly linked to their commercial or treasury financing activities ('hedging'). Also in the future, only non-hedging contracts are counted towards the thresholds triggering the clearing obligation. While under the current rules NFCs must clear all derivatives, if they exceed the clearing threshold for one class of derivatives, the Commission is now proposing that NFCs clear only the asset classes for which they have breached the clearing threshold, thereby reducing the burden for NFCs as they only have to centrally clear the asset classes in which they are most active.
Financial counterparties:
Small financial counterparties are numerous but account only for very small volumes of OTC derivatives and of systemic risk. They currently have significant difficulties to find clearing services providers. The proposal introduces a clearing threshold for small financial counterparties, such as small banks or funds. This clearing threshold is based on the volume of OTC derivatives transactions. While all financial counterparties are required to report and collateralise OTC derivative transactions, only counterparties exceeding that threshold would be required to clear centrally.
Pension funds:
Pension funds typically enter into OTC derivative transactions to protect their long-term liabilities to current and future pensioners against complex market risks. While central clearing of such transactions appears important, pension funds do not have normally access to the necessary cash collateral, and no specific solutions have been developed so far. Today's proposal introduces a new three–year temporary exemption for pension funds from central clearing. This will allow the various counterparties involved, including pension funds, central counterparties and the clearing members that provide clearing services, to develop a solution that enables pension funds to participate in central clearing without negatively impacting the revenues of future pensioners.
Speech by Vice-President Dombrovskis on EMIR REFIT
Today's proposal builds on our call for evidence on financial regulation. EMIR is doing well overall. However, there is room for targeted adjustments to make it more proportionate and efficient. Our aim is to achieve the same prudential results but with less cost to Europe's companies and our economy. This is the approach the EU is taking when we review our financial regulation. It is also the approach taken by international bodies and recently endorsed by the G20 in Baden Baden.
Our main proposals today include the following:
We are streamlining our reporting rules to alleviate reporting requirements in particular for businesses, without compromising on the quality of the data collected. These changes could save businesses up to €1.1 billion in operational costs and up to €5.3 billion in one-off costs.
We are providing three years to develop technical solutions for pension funds to take part in central clearing while protecting the revenue of future pensioners. While central clearing for pension funds remains our clear goal, this temporary exemption will help them avoid estimated losses of up to €1.6 billion.
[...] Some third country CCPs play a key systemic role for EU financial markets, and have a particular impact on the responsibilities of EU and Member States institutions. Our supervisory framework also needs to deal with these specific situations.
This is particularly relevant in the context of the UK leaving the EU, and therefore also leaving the EMIR framework. The UK currently plays a key role in providing clearing services in Europe. For example, as many as 75% of euro-denominated interest rate derivatives are cleared in the UK.
It is also an issue which has been raised by many stakeholders from EU institutions and Member States. It is important to start more detailed deliberations on this soon, to give businesses clarity on the regulatory situation in the EU. We intend to propose further legislative proposals on CCPs in June, based on an impact assessment.
For third country CCPs which play a key systemic role for the EU, we are looking in particular at two possibilities for enhanced supervision: We can ask for enhanced supervisory powers for EU authorities over third country entities. Or such CCPs of key systemic importance for the EU could be asked to be located within the EU. We now need to look at these options in the impact assessment.
While minimising the risk of market fragmentation, the EU needs to be able to ensure supervisory oversight over such key CCPs.
Questions and Answers on the proposal to amend the European Market Infrastructure Regulation (EMIR)