As we near the one-month post-Brexit referendum mark, many of us are seeking some respite from all the uncertainty, which the result has introduced. One thing does however remain sure; we can retire to the relative security of the long list of European Union (EU) regulatory transaction reporting implementations which are still to be undertaken.
Since the elusive European Market Infrastructure Regulation (EMIR) Review is likely to be the next significant EU regulation update, now is a good time to take a closer look at the current state of the regime and laying out what we should expect from the European Commission’s (EC) EMIR Review final report. Here are answers to questions we all have faced at one point or another since the EMIR regulatory reporting mandate took effect on 12 February 2014.
Why is there an EMIR review?
Well, the EMIR Regulation 648/2012 requires the EC to prepare a report on EMIR’s implementation and submit a final report to the European Parliament and the Council with appropriate proposals. It’s worth clarifying at this point that the EMIR Review covers clearing, reporting and bilateral margining, so our shared regulatory reporting interests are just one part of the yet-to-be-published report.
The legislative review requirement is an important control which enables the EC, European Securities and Markets Authority (ESMA), relevant authorities and public stakeholders to address any unintended regulatory consequences. Britain’s European Commissioner, Jonathan Hill recently resigned his financial services brief, which was transferred to European Commissioner Valdis Dombrovkis, the former Latvian prime minister. Prior to his resignation, Lord Hill hosted a public hearing on the EMIR Review call for evidence where he made the following remark, “It should be possible to make EMIR more proportionate and continue to mitigate systemic risk in our derivative markets. It should be possible to lower administrative reporting burdens. And all this while ensuring supervisors have enough information to monitor risks, and intervene if necessary. I want to use the EMIR review to do that.” Let’s hope that the newly appointed Commissioner Dombrovkis is in agreement.
Who contributed to the EMIR Review?
The EC encouraged all market participants and stakeholders to provide their EMIR implementation feedback and, to that end, on 21 May 2015 published their call for evidence as a public questionnaire. Separately, ESMA also submitted to the EC the following four reports containing their own recommendations:
- EMIR Review Report no.1 – Review on the use of OTC derivatives by non-financial counterparties;
- EMIR Review Report no.2 – Review on the efficiency of margining requirements to limit procyclicality;
- EMIR Review Report no.3 – Review on the segregation and portability requirements; and
- EMIR Review Report no.4 – ESMA input as part of the Commission consultation on the EMIR Review.
The fourth report is pertinent to EMIR trade reporting (section 6) and trade repositories (section 9) and for further detailed analysis, Abide Financial published an article last year with COO Connect. The ultra-condensed recap of ESMA’s recommendations contained in Report no.4 is as follows: exchange traded derivatives should continue to be reportable; double-sided reporting should remain; counterparties should be obliged to report on behalf of NFC-; and there should be no back-loading of trades closed pre-EMIR.
Why is there an EMIR Rewrite and a Review?
Since ESMA had already begun its public consultation specifically on the EMIR reporting technical standards ahead of the EC’s more general EMIR Review, the EMIR Review questionnaire explicitly requested no feedback be given regarding the EMIR reporting technical standards. It’s always encouraging to see the EC and ESMA collaborating to improve reporting standards, especially when market participants share the risk of duplicate and conflicting work efforts. ESMA submitted their EMIR Rewrite final report for the EC’s adoption back in November 2015, and the Commission may elect to combine the two work streams in a single final report. For more details, see Abide Financial’s analysis.
What happens next?
For transaction reporting, this is the first regulatory legislation review process that is progressing towards completion and, yes, we can confirm that both Markets in Financial Instruments Directive (MiFID II) and Securities Financing Transactions Regulation (SFTR) also contain similar regulatory self-review provisions. We do know that the MiFID II mandate is set for 3 January 2018 and the SFTR mandate is likely to land somewhere in the second half of 2018. An update from the Futures Industry Association (FIA) suggests that the EC will publish the EMIR Review final report in Q4 2016 which, in turn, would likely lead to a mid-2017 implementation date. We will continue to track the EC’s progress with the EMIR Review and, when appropriate, communicate an update. For now, a parting quote from ESMA’s Chairman Steven Maaijoor ISLA conference speech, “The timeline of the EMIR review is in the hands of the Commission, and in light of the recent messages by Commissioner Hill, it would seem unlikely that it would collide with the commencement of reporting under SFTR.”