Regulatory reforms charting a new course Territorial Scope of Reporting, Clearing and Trading Chris Bates May 2014
EMIR and MiFID2/MiFIR: timeline 15 March 2013 Confirmations Daily valuation NFC+ reporting 1 January 2014 CRD4/CRR: capital rules 12 February/11 August 2014 Reporting to TRs 10 April/10 October 2014 Application to TCE-TCE trades Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2013 2014 2015 2016 2017 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 15 September 2013 Portfolio reconciliation Portfolio compression Dispute resolution 18 March 2014 First CCP authorised: Clearing member obligations Frontloading First clearing obligation starts* 3 year phase-in for NFC+s Margining uncleared trades* MiFID2/MiFIR: transparency, platform trading, position limits, etc.* Estimated start dates for these obligations. 2
What obligations are imposed under EMIR? Clearing Obligation to clear transactions through a CCP authorised or recognised in the EU Obligation for non-financial counterparties subject to clearing to notify regulator Risk mitigation Operational risk mitigation: arrangements for timely confirmation, portfolio reconciliation and compression and dispute resolution (and reporting to regulators) Daily valuation: mark-to-market and mark-to-model Margining: mandatory exchange of margin Capital for uncollateralised risk Reporting to TRs Reporting of transactions to trade repositories (TRs) registered or recognised by ESMA Record keeping of transactions Members of CCPs Disclosure of fees and client protections, segregation of accounts and use of margin 3
Who is subject to the EMIR obligations? Financial counterparty (FC) Investment firms Credit institutions Insurance/reinsurance companies Pension funds UCITS (mutual funds) and their managers Alternative investment funds (AIF) managed by AIF manager If authorised or registered under relevant EU directive Non-financial counterparty over the clearing threshold (NFC+) NFC... whose positions in OTC derivatives exceed the clearing threshold Obligation to notify competent authority (effective 15 March 2013) Non-financial counterparty (NFC) Undertaking established in the EU not an FC or CCP Non-EU entity (TCE) Undertaking established outside the EU Which would be subject to the relevant obligation if established in the EU Exempt entities: Article 1(4) Article 1(5) Pension funds (clearing) 4
Who is subject to the EMIR obligations?* Clearing FCs** NFC+s** TCEs*** Risk mitigation: Operational: procedures FCs NFC+s Other NFCs Operational: reporting to regulators FCs Daily valuation FCs NFC+s Margining **** FCs NFC+s Capital FCs Reporting to TRs FCs NFC+s Other NFCs Members of CCPs Members of EU authorised CCPs Does not address trades between two TCEs; ** if counterparty is an FC, NFC+ or TCE; *** if counterparty is an FC or NFC+; **** if counterparty is an FC, NFC+ or any non-eu entity (proposed) 5
Where do the clearing and risk mitigation rules apply? EU Non-EU FC or NFC* Exceptions: NFC+ notification; Daily valuation; FC regulatory reporting obligations OTC derivative FC or NFC* FC or NFC* OTC derivative TCE** Only if transaction has a direct, substantial and foreseeable effect in the EU or if necessary or appropriate to prevent evasion of EMIR rules TCE OTC derivative TCE Note: Categorisation of a branch likely to follow categorisation of legal entity. Non-EU AIFs are categorised as FCs in the EU if they are managed by an AIF manager authorised or registered in EU under AIFM Directive. * Clearing rules only apply to NFC+s; ** ESAs propose that FCs and NFC+s should collect margin from all non-eu entities 6
Application to transactions between two TCEs The clearing and risk mitigation obligations apply to transactions between TCEs where: The transaction would have a direct, substantial and foreseeable effect within the EU; or It is necessary or appropriate to apply the obligation in order to prevent evasion. Technical standards adopted by the European Commission define when these provisions apply. Direct, substantial and foreseeable effect : Where one counterparty benefits from a guarantee (meeting specified quantitative standards) from an FC; or Where two EU branches or non-eu entities deal with each other Applies from 10 October 2014 Necessary or appropriate to prevent evasion : Where primary purpose to defeat object, spirit or purpose of EMIR Including where part of an artificial arrangement Arrangement is artificial if lacks business rationale, commercial substance or relevant economic justification Applies from 10 April 2014 7
Application to asset management clients EU established funds and clients If they are FCs or NFCs (and not exempt) Required to comply with EMIR clearing, reporting and risk mitigation rules (as applicable) Even if the asset manager/counterparty outside EU Practical issues around delegation of performance Non-EU established funds and clients Not required to comply with EMIR clearing, reporting and risk mitigation rules Even if asset manager/counterparty in EU Except: Non-EU AIFs managed by an EU authorised/registered AIFM are treated as FCs (i.e. EU) Clearing obligation may apply if transact with an FC/NFC+ If transact with an FC/NFC may be required to facilitate their compliance Possible application of TCE-TCE rules 8
Duplicative or conflicting obligations? EMIR envisages equivalence assessments by the Commission of non-eu jurisdictions: as part of the recognition process for non-eu CCPs; as part of the recognition process for non-eu TRs; for the purpose of determining the exemption from conflicting or duplicative clearing, reporting and risk mitigation obligations for transactions with a counterparty established in an equivalent non-eu jurisdiction (also relevant to the intra-group exemption). US Japan Australia Hong Kong Singapore CCPs TRs Conflicting/ duplicative rules Deemed compliance Where at least one counterparty is established in an equivalent jurisdiction, both counterparties are deemed to have complied with the clearing, risk mitigation and reporting obligations. No clear timetable for the Commission to adopt its assessments after receives advice Positive assessment depends on progress in non-eu jurisdictions in adopting and implementing regulations reflecting G20 commitments. Timing may be affected by negotiations on US extraterritoriality. Switzerland Canada India South Korea Rest of world Key nature of ESMA advice on non-eu regime: Non-EU regime equivalent (exc. ASX equities clearing) Non-EU regime only partially/conditionally equivalent (or reciprocity issues) Premature to give advice No current request for ESMA advice 9
Intra-group transaction exemption Clearing / margin obligations Article 3 EMIR definition of intragroup Additional requirements to be met for margin obligation Parties using exemption from the margin rules for intra-group transactions are subject to ongoing public disclosure requirements. For transactions with non-eu group companies, it may be necessary for the Commission first to have assessed the non-eu jurisdiction as having equivalent regulation for EMIR purposes. UK FCA has made its Web Portal available for applications for exemption between two UK group entities. Apply to / notify competent authority Not less than 30 days in advance 10
Derivatives mandatory trading obligation under MiFIR OTC derivative subject to the clearing obligation under EMIR Not an intragroup transaction under Article 3 EMIR Declared subject to mandatory venue trading obligation Must be traded only on: Not subject to transitional provisions under Article 89 EMIR In order to become subject to mandatory trading, derivatives must be: Admitted to trading on at least one relevant trading venue; Sufficiently liquid ESMA to take into account anticipated impact on liquidity of relevant derivatives and commercial activities of end users ESMA also to consider whether derivatives only sufficiently liquid in transactions below a certain size Regulated market MTF OTF Equivalent third country market 11
Derivatives mandatory trading obligation (2) OTC derivative subject to the clearing obligation under EMIR Not an intragroup transaction under Article 3 EMIR Declared subject to mandatory venue trading obligation Regulated market Must be traded only on: MTF Not subject to transitional provisions under Article 89 EMIR OTF Equivalent third country market Effective equivalent recognition for EU trading venues in relation to derivatives; Commission decision that there are equivalent legally binding requirements: Authorisation and supervision; Venue has clear and transparent rules on admission to trading; Issuers are subject to periodic information requirements; Market abuse rules Commission decision only for purposes of determining eligibility as a trading venue for these purposes, and may be limited to a category or categories of trading venues. 12
Who is subject to mandatory trading? FC or NFC+ OTC derivative FC or NFC+ EU Non-EU Only if transaction has a direct, substantial and foreseeable effect in the EU or if necessary or appropriate to prevent evasion FC = financial counterparty NFC+ = non-financial counterparty over the EMIR clearing threshold TCE = non-eu entity which would have been subject to the trading obligation if established in the EU Third country financial institution = non-eu entity authorised to carry on any of the activities listed in BCD, MiFID 2, Solvency II, UCITS, IORPs, AIFMD FC or NFC+ OTC derivative Third country financial institution or TCE TCE Where possible and appropriate, ESMA s technical standards shall be identical to those under EMIR OTC derivative TCE Note: Exemption for duplicative or conflicting obligations. Treatment of entities exempt under Article 1(4) or 1(5) EMIR? 13
Questions? EMIR update 14
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