The reach of the European Market Infrastructure Regulation (EMIR) is widening with branches of non-EU financial institutions clearly on the radar of European regulators. The recently published draft rules from the European Securities and Markets Authority (ESMA) make clear that EU regulators intend to have their arms around the widest possible set of OTC derivatives transactions if they could pose a threat to financial stability within the EU.
Specifically, ESMA intends to bring transactions between two EU branches of non-EU financial institutions within the scope of EMIR. We are still waiting for ESMA to clarify the position between one EU counterparty and one non-EU counterparty. This could lead to a significant challenge for some firms. Helpfully ESMA does offer an olive branch. If the home country of the institution is deemed by the EU Commission to have an equivalent regulatory, supervisory and enforcement regime then the branch can rely on its home rules and essentially opt out of the requirements in EMIR.
At face value this is encouraging but there are two short term obstacles. Firstly, the debate on equivalence is both technical and highly politically charged, particularly between the EU and the US. Secondly, global implementation of derivatives rules is at varying stages with many jurisdictions still a long way from having an operational regime in place. In the meantime EU branches of non-EU financial institutions are likely to have to meet the requirements in EMIR.
ESMA's focus also goes wider. ESMA proposes to bring into scope transactions by a non-EU financial counterparty if that counterparty benefits from a guarantee from an EU financial counterparty which covers all or part of its liability resulting from OTC derivative contracts. Such an approach would need careful consideration by firms.
What does this mean for firms?
These proposals, if adopted, will bring another layer of complexity to global firms' derivative implementation plans. As EMIR applies at the transaction level there will be clear operational and compliance challenges in determining which regulatory regime applies for which transaction and what actions need to be taken. Firms will need to have robust monitoring arrangements in place as well as reaching agreement with their counterparties on which regime to apply for each trading scenario.
What happens next?
The EU Commission has to decide whether to adopt these rules by 15 February 2014. Given the political statements to date we expect the Commission to share ESMA's ambition to capture trades which might pose a risk to financial stability within the EU. ESMA proposes to give firms caught by these rules a grace period – each rule will apply six months after its application date. But this leaves little room for complacency and firms that expect to be caught by these rules need to start planning now. If the Commission gives the green light firms will have little time to get ready, especially as parts of EMIR are already live. Indeed, firms will need to meet the timely confirmation requirements immediately and if the final rules enter into force after 15 March 2014 the other risk mitigation requirements will also apply. Focus will then quickly then turn to a 12 August reporting start date with clearing likely to start in 2015.
For more on EMIR, read Fiona's last article, ' EMIR OTC derivative reporting | Will you be ready in time?' (published 8 November) or visit www.Deloitte.co.uk/Centre.
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