On 5 February 2013, the Economic and Monetary Affairs Committee (ECON) of the EU Parliament published a motion for a resolution regarding two of the Regulatory Technical Standards (RTS) produced by ESMA under EMIR. The relevant RTS are:
- regulatory technical standards on indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, risk mitigation techniques for OTC derivatives contracts not cleared by a CCP (the “Risk Mitigation RTS”); and
- regulatory technical standards on requirements for central counterparties (the “CCP RTS”).
The motion for a resolution follows ECON’s rejection of both the Risk Mitigation RTS and the CCP RTS on 4 February 2013 and calls on the EU Parliament to object to both RTS at a vote during a plenary session of the EU Parliament scheduled for 7 February 2013. It had been widely assumed that the EU Parliament would follow the ECON lead. Interestingly, however, Risk Magazine is today reporting that the EU Parliament may notreject the RTS in the full vote due to the delay in implementing EMIR which would result from the fact that the RTS would have to be sent back to ESMA to be re-drafted.
Recitals N to Y (inclusive) of the motion for a resolution detail the concerns of ECON which, in summary, relate to the following issues:
- The Clearing Threshold: ECON is concerned that a non-financial counterparty exceeding the clearing threshold in one class of OTC derivatives should not automatically result in it exceeding the clearing threshold in all classes of OTC derivative. Specifically, ECON points to Recital 25 of the Risk Mitigation RTS which states that “the excess of one of the values set for a class of OTC derivatives should trigger the excess of the clearing threshold for all classes”. This, ECON believes, is not consistent with Article 10(4)(b) of EMIR which requires ESMA to specify values of the clearing threshold taking into account net positions and exposures per counterparty and per class of OTC derivative;
- The Clearing Threshold: ECON notes the fact that Article 10(4)(b) of EMIR requires the value of the clearing threshold to be set by reference to “the systemic relevance of the sum of net positions and exposures”. In contrast, Article 11 of the Risk Mitigation RTS attempts to set the clearing threshold by reference to the “gross notional value” of OTC positions. ECON considers this trigger to be unduly sensitive;
- Liquidation Periods: ECON claims that Article 26(1) of the CCP RTS discriminates between derivatives traded on a regulated market and OTC derivatives that are subject to both the clearing and trading obligation and have comparable risk profile by setting different liquidation periods for margin calculation purposes (2 business days for the former compared to 5 business days for the latter);
- Liquidation Periods: Article 26 of the CCP RTS specifies a liquidation period for financial instruments other than OTC derivatives of 2 business days. ECON believes that this results in a divergence with equivalent arrangements determined in the US, and exceeds the recommendations included in the CPSS-IOSCO principles for financial market infrastructure established on 16 April 2012. As such, ECON believes that this provision does not comply with Recital 90 of EMIR;
- Mark-to-market Valuations: ECON considers that Article 13 of the Risk Mitigation RTS does not sufficiently reflect the position under Article 11(2) of EMIR which requires only non-financial counterparties which exceed the clearing threshold to mark-to-market their outstanding positions on a daily basis;
- Portfolio Reconciliation: Article 13(3)(b) of the Risk Mitigation RTS requires non-financial counterparties which have not exceeded the clearing threshold to conduct portfolio reconciliation on a quarterly basis if they have more than 100 OTC contracts outstanding with a counterparty. ECON believes that this will result in disproportionate cost to non-financial counterparties and considers that a threshold of 300 OTC derivative contracts would be more appropriate in these circumstances;
- Electronic Confirmations: Article 11(1) of EMIR requires financial counterparties and non-financial counterparties which enter into non-cleared trades to ensure, inter alia, “the timely confirmation, where available, by electronic means, of the terms of the relevant OTC derivative contract”. ECON feels that Article 12 of the Risk Mitigation RTS does not appropriately reflect the intention of EMIR to allow for alternative (i.e. manual) procedures to be considered on a permanent basis for certain counterparties or transactions that are not suitable for electronic confirmation. It has to be said that, on a reading of both EMIR and the relevant RTS, there do not appear to be strong grounds to support this particular objection;
- Bank Guarantees: Under Article 46(1) of EMIR a CCP may accept bank guarantees as collateral from non-financial counterparties, taking such guarantees into account when calculating its exposure to a bank that is a clearing member. Annex 1 Section 2(1)(h) of the CCP RTS sets out the detailed conditions under which bank guarantees may be accepted. This requires that bank guarantees are “fully backed” by collateral (a) that is not subject to wrong way risk”, (b) to which the CCP has prompt access and, (c) that is bankruptcy remote in case of the simultaneous default of the clearing member and the guarantor. ECON believes that, in practice, these additional requirements make it “virtually impossible” for non-financial counterparties to use bank guarantees as collateral.
Interestingly, the resolution hints at underlying tension between the EU Parliament and the EU Commission regarding their respective roles in the legislative process. Recital D is disapproving of the fact that the EU Commission took six weeks to inform the Parliament of its decision not to adopt the draft RTS on colleges for CCPs. Recital L is strongly suggestive that the EU Parliament was irritated by the fact that it submitted comments on the RTS to the EU Commission shortly after the RTS were first submitted by ESMA, but the EU Commission only replied to those comments after the adoption of the RTS by the EU Commission. Lastly, Recital M hints at the EU Parliament’s annoyance at not being formally notified of the fact that ESMA had not submitted all of the RTS required under EMIR by the 30 September 2012 deadline.
We should all know more tomorrow, but stay tuned as this is a story that seems to have some way left to run.
This piece is cross-posted from Regulatory Reform with permission.