ABBL
Association des Banques et Banquiers, Luxembourg
The Luxembourg Bankers' Association
Luxemburger Bankenvereinigung
On 29 March 2012, the European Parliament adopted the final text of the Regulation for the European Market Infrastructure Regulation (EMIR), with the aim to introduce greater transparency and better risk management to the ‘over the counter’ (OTC) Derivatives market.
Concretely EMIR, which is expected to be applicable as of 1 January 2013, will introduce:
i) a clearing obligation for eligible OTC derivatives with measures to reduce counterparty credit risk and operational risk for bilaterally cleared OTC derivatives,
ii) common rules for central counterparties (CCPs),
iii) a reporting obligation for OTC derivatives,
iv) rules on the establishment of interoperability between CCPs,
v) the concept of data trade repositories.
EMIR has to be seen in a broader global context. In Pitsburgh in 2009, the G20 leaders committed to the implementation of strong measures to “improve transparency and regulatory oversight of [OTC] derivatives in an internationally consistent and non-discriminatory way.” In the US, the Dodd-Frank Act defines the OTC Derivatives market regulation.
The situation is slightly more complex in Europe. Besides EMIR, which focuses on the post-trade handling of OTC contracts, other aspects of OTC regulation also need to be simultaneously addressed, notably for the trading/negotiation side by MiFID 2 and the Market Abuse Directive.
Other more remote texts may also intervene in the debate, among them the Securities Law Directive, the Central Securities Depositaries Regulation, and of course the EU version of the Basel III Accord (CRD IV).
For the ABBL, it is of paramount importance to keep the broad picture in mind with all these changes in order to avoid certain redundant or conflicting requirements.
OTC Derivatives
A derivative is a financial contract linked to the future value or status of the underlying to which it refers (e.g. the development of interest rates or of a currency value, or the possible bankruptcy of a debtor).
Over-the-Counter (OTC) derivative contracts are not traded on an exchange (for example the London Stock Exchange) but instead privately negotiated between two counterparts (for example a bank and a manufacturer). OTC derivatives account for almost 90% of the derivatives markets. In December 2009, the notional value of outstanding OTC derivatives was around $615 trillion or €435 trillion. The OTC derivatives market comprises a wide variety of product types across several asset classes (interest rates, credit, equity, foreign exchange (FX) and commodities) with widely differing characteristics and levels of standardisation. OTC derivatives are used in a variety of ways, including for purposes of hedging, investing, and speculating. Contrary to derivatives traded on exchanges, OTC derivatives are not automatically cleared through CCPs or subject to reporting rules.
A hypothetical example of hedging: a plane manufacturer has a contract to build 6 planes in the next 6 months and will need 10 tonnes of steel per plane. He may want to guarantee that whatever the fluctuations in the market of the price of steel, he gets steel at a certain fixed price for the next 6 months so as to be able to deliver the planes on budget. To cover for the risk of steel rising, the plane manufacturer could enter into an OTC contract with a bank for example. They could agree on a set price for a set quantity of steel for 6 months. If, after 6 months, when the contract matures, the market price turned out to be lower, the bank would make a profit; but if the market price turned out to be higher, then the plane manufacturer would be able to purchase the steel a price lower than the market price and thus save money.
(Source: European Commission)
Central Counterparties (CCP)
A CCP is an entity that interposes itself between the two counterparties to a transaction, becoming the buyer to every seller and the seller to every buyer. A CCP's main purpose is to manage the risk that could arise if one counterparty is not able to make the required payments when they are due –i.e. defaults on the deal.
CCPs are commercial firms. There are currently about a dozen CCPs, all but one located in Europe or the USA, clearing interest rates, credit, equity and commodities OTC derivatives. There is currently no CCP clearing FX OTC derivatives.
(Source: European Commission)
Trade repositories
A trade repository is a central data centre where details of derivatives transactions are reported.
Trade repositories are commercial firms. There are global trade repositories for credit, interest rate and equity OTC derivatives. Trioptima in Stockholm houses a global interest rate repository and DTCC Derivatives Repository Ltd in London houses a global equity derivatives repository and maintains global credit default swap data identical to that maintained in its New York based Trade Information Warehouse.
(Source: European Commission)
Articles
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16/04/2012
New and more demanding international standards for payment, clearing and settlement systems, including central counterparties, have today been issued by the CPSS and IOSCO in a report titled Principles for financial market infrastructures. Among other things, the standards will provide important support for the G20 strategy to make the financial system more resilient by making central clearing of standardised OTC derivatives mandatory. CPSS and IOSCO members will strive to adopt the new standards by the end of 2012. Financial market infrastructures (FMIs) are expected to observe the standards as soon as possible.
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07/03/2012
As part of its ongoing efforts to create a sounder financial system, the European Commission has proposed today to set up a European common regulatory framework for the institutions responsible for securities settlement, called Central Securities Depositories (CSDs). The proposal will bring more safety and efficiency to securities settlement in Europe. It also seeks to shorten the time it takes for securities settlement and to minimise settlement fails.
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21/02/2012
On 9 February 2012, Michel Barnier welcomed the work done by the major EU Institutions that have finally reached an agreement on the contested EMIR proposal. This would mark the entry of a new actor in the legislative process: Indeed, ESMA will now be required to prepare with the EU Commission secondary level legislation.
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20/02/2012
The Regulation of the European Parliament and Council on OTC Derivatives, CCPs and trade repositories (EMIR) delegates or confers powers to the Commission to adopt regulatory technical standards (RTS) and implementing technical standards (ITS) on a number of areas. This discussion paper covers the draft RTS and ITS which ESMA is required to develop.
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09/02/2012
After long negotiations a compromise deal on new EU legislation to regulate trade in over-the-counter (OTC) Derivatives and make the Derivatives market safer and more transparent was struck by Parliament and Council representatives on 9 February 2012.
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05/10/2011
The draft regulation calls for reporting of all derivative contracts to trade repositories and the clearing of standardised OTC derivative contracts through central counterparties in order to reduce counterparty risk. This is aimed at preventing the default of one market participant causing the collapse of other market players, thereby putting the entire financial system at risk.
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16/09/2011
On 15 September 2011, the ABBL organised a conference in the “ABBL meets members” series on the European Market Infrastructures Regulation (EMIR) and welcomed several key EU players in the field to provide an expert view on market infrastructure regulation.
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08/09/2011
The European Council published on 29 August 2011 a further Presidency compromise proposal, for a regulation on OTC derivative transactions, central counterparties and trade repositories.
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28/07/2011
Conceptually, the ABBL supports the principles put forward and appreciates the need to define and adapt high-level global principles for institutions that act as market infrastructures for all financial actors. In the ABBL’s opinion, the principles defined at such a global level should be of a broad enough nature so as to be accommodated in regulatory texts in the different regions where they would be applicable.
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19/07/2011
On 15 September 2010, exactly two years after the fall of Lehman Brothers, the European Commission published its draft proposal for the European Market Infrastructure Regulation (EMIR), with the aim to introduce greater transparency and better risk management to the ‘over the counter’ (OTC) derivatives market.
Glossary
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Last udpate April 2012
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