On 8 March 2016, the European Supervisory
Authorities (EBA, EIOPA, ESMA - ESAs) published today the final draft
Regulatory Technical Standards (RTS) outlining the framework of the European
Market Infrastructure Regulation (EMIR).
These RTS cover the risk mitigation techniques
related to the exchange of collateral to cover exposures arising from
non-centrally cleared over-the-counter (OTC) derivatives. They also specify the
criteria concerning intragroup exemptions and the definitions of practical and
legal impediments to the prompt transfer of funds between counterparties. These
standards aim at increasing the safety of the OTC derivatives markets in the
EU.
The draft RTS contain the following provisions:
- For OTC derivatives not clear by a Central
Counterparty (CCP), the draft RTS prescribe that counterparties have to
exchange both initial and variation margins. This will reduce counterparty
credit risk, mitigate any potential systemic risk and ensure alignment
with international standards.
- The draft RTS outline the list of eligible
collateral for the exchange of margins, the criteria to ensure the
collateral is sufficiently diversified and not subject to wrong-way risk,
as well as the methods to determine appropriate collateral haircuts.
- The draft RTS lay down the operational
procedures related to documentation, legal assessments of the
enforceability of the agreements and the timing of the collateral
exchange.
- The draft RTS cover the procedures for
counterparties and competent authorities related to the treatment of
intragroup derivative contracts.
The RTS will be applied in a proportionate
manner to allow counterparties to phase in the requirements.
Legal framework and background
These draft RTS have been developed on the basis of Article 11(15) of Regulation (EU) No 648/2012 (EMIR), which establishes provisions aimed at increasing the safety and transparency of the over-the-counter (OTC) derivatives markets in the EU.
In developing these standards, the ESAs have taken into consideration the need for international consistency and have, therefore, used the framework established by the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO) and the BCBS supervisory guidance for managing risks associated with the settlement of foreign exchange transactions, while taking into account the specific features of the European financial market.
In order to address risks related to the derivative markets, the European Parliament and the Council have adopted the European Market Infrastructure Regulation (EMIR) – formally known as Regulation EU No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (EMIR).
EMIR establishes provisions aimed at increasing the safety and transparency of the OTC derivatives markets and requires OTC derivative contracts to be cleared, derivative transactions to be reported to trade repositories and sets a framework to enhance the safety of central counterparties (CCP).
The EMIR was published on 4 July 2012 and entered into force on 16 August 2012. It is directly applicable in all EU Member States.
For more information on EMIR click here.