ESMA Readies Derivatives Regulations with Globally Consistent End-User Exemption to Implement EMIR

The European Securities and Markets Authority (ESMA) plans to submit standards implementing the European Market Infrastructure Regulation (EMIR) to the European Commission by September 30, said ESMA Chair Steven Maijoor. In recent remarks at the Europlace Financial Forum in Paris, he noted that the standards will include an end-user exemption similar to the one expected to be in place under the Dodd-Frank Act. ESMA proposes a broad definition of hedging to ensure that end users employing OTC derivatives to hedge risks related to their commercial business are exempted. The standards on clearing thresholds will also be globally consistent, noted the Chair, although substantial differences between EMIR and Dodd-Frank complicate the issue.

Another essential component of EMIR is ensuring that central counterparties  are safe and sound whatever financial instrument they clear.  In order to do that, regulators cannot simply rely on  high level regulation.  They need to enter into the details of the risk management, organization and business conduct of the central counterparties. The ESMA standards recognize that central counterparties are generally best placed to manage the risks arising from their clearing activity. Regarding skin in the game, which is the central counterparties' own resources to be sued after exhausting the resources of the defaulting clearing member, ESMA sets it at 50 percent of the minimum capital requirements.

In addition, ESMA proposes standards on the details and format of the information to be reported to trade repositories.  This reporting standard will ensure that trade repositories serve their main objectives of increasing transparency in derivatives markets for the purpose of monitoring systemic risk and facilitating the detection of possible market abuses. ESMA also proposes standards regarding the information to be provided by trade repositories to ESMA for the purpose of their authorization. Finally, standards are

proposed regarding the  data that trade repositories will need to  make available to the public and to relevant authorities.

On the international dimension, ESMA is not yet consulting on the standards relating to the issue  about  which transactions outside the EU should be subject to the EMIR requirements. ESMA must coordinate with its counterparts outside the EU before consulting on specific proposals. Chairman Maijoor assured that in these international discussions ESMA will avoid breaking up a global market into a number of local ones for the simple purpose of applying domestic EU regulations.

He noted that European nations have long experience of relying on each other’s regulation and in assessing  the  equivalence of third country systems.  These concepts  have  allowed European financial markets to grow significantly. If the EU wants the global markets to grow as well, he noted, regulators and standard setters must extend these principles to the international level.