This article was written by Karen Butler (managing associate) and Charlotte Collins (professional support lawyer)
The European Commission has published a report, which concluded that certain modifications should be made to the core counterparty requirements under EMIR.
The proposed modifications include:
- simplifying and streamlining the trade reporting requirements (possibly permitting replacing the dual-sided reporting requirement with a single entity reporting requirement);
- including a mechanism for suspending the clearing obligation in response to market turbulence or resolution situations;
- potentially requiring initial margin models to be endorsed by regulators (as is the case in the US) to help participants in non-cleared OTC derivatives contracts have confidence that their calculations are considered to be compliant; and
- reviewing whether particular obligations should apply to lower-risk market participants such as above threshold non-financial counterparties (NFC+s) and small financial counterparties.
In relation to the final point above, the Commission will assess whether it is still proportionate to apply the clearing and margin requirements to some or any NFC+s, as their inclusion may not actually reduce systemic risk substantially. Many small financial counterparties have struggled to access clearing facilities and so the Commission will consider what action is required to help them comply with the clearing obligation.
The Commission will also assess whether the current exemption for pension scheme arrangements should be extended or even made permanent.
Other issues the Commission will consider are whether the application of “frontloading” (requiring contracts to be cleared that are entered into before the clearing obligation enters into force), and the application of operational risk mitigation requirements to intragroup transactions, are appropriate.
The Commission plans to propose a legislative review of EMIR in 2017, taking into account the issues raised in this report. It will also use this opportunity to review the prescriptive measures contained in the Level 2 legislation. Any attempts to simply the regime will be welcomed by market participants, including non-financial end users who have incurred significant cost and expense in complying with this complex legislation in a very short period of time.