We recently wrote about the first deadline for clearing in the United States, which applies to swap dealers, major swap participants and active funds. We now have official confirmation of the deadline for a number of requirements under the European Market Infrastructure Regulation (EMIR). With the publication this past Monday of the regulatory technical standards under EMIR, that date is now confirmed as March 15 ‒ less than two weeks away.
Under the CFTC rules in the US, non-financial end users will not be subject to the clearing mandate. That is not the case in Europe, where non-financial end users (called non-financial corporations, or NFCs), depending on their level of activity, may be required to clear transactions if their derivatives activity exceeds thresholds of €1-3 billion (after hedging), depending on asset class.
But the immediate focus under EMIR is not clearing, but several other requirements.
In order to assist end users in navigating the EMIR rules to determine which provisions they need to comply with, we held a webinar this week. Our public policy team was joined by end user representatives who have been at the forefront of derivatives regulatory developments (you can access the slides from the webinar here).
The webinar focused primarily on the compliance needs of European NFCs. Of particular interest were the challenges faced by smaller firms who may not have the resources to keep up with the rapidly changing regulatory landscape, nor with the new obligations EMIR creates for them. As such, a key objective of the webinar was to increase awareness of the obligations and promote compliance.
Equally important to convey was that even if NFCs do not face a clearing requirement from EMIR, they will face other requirements under this Regulation, some applying as soon as March 15. And of course, their counterparties ‒ the providers of OTC derivatives ‒ will be subject to all the new EMIR rules, which will affect the pricing and availability of OTC derivative products for everyone.
On March 15 the confirmations obligation kicks in for all entities in scope under EMIR (financial corporations (FCs) and NFCs alike), and EMIR requires that all such entities have procedures and arrangements in place to confirm transactions. For subgroups of FCs and for those NFCs that are likely to exceed the above-mentioned clearing threshold (sometimes referred to as NFC+s), there are additional obligations in the form of required daily mark-to-market and mark-to-model valuations.
That fast-approaching Friday, March 15, is also the date by which potential NFC+s are required to declare to their competent authority if they exceed the clearing threshold. Such thresholds are set by asset class (again, €1-3 billion exclusive of “hedging” transactions), and breaching a threshold in any asset class creates the obligation to clear all asset classes.
Later in the year (around Q3), all entities face obligations that address portfolio reconciliation, portfolio compression, and dispute resolutions. Reporting to trade repositories begins for interest rates and credit derivatives, effective 90 days after a trade repository has registered. Other asset class reporting will be phased in beginning in 2014. Finally, mandatory clearing will start some time in the summer of 2014, assuming all goes well with the CCP authorization process.
Clearly, a lot lies ahead. ISDA is committed to work closely with the regulatory community and will continue – through the Regulatory Implementation Committees (RICs) that have been set up for this purpose – to interpret the new obligations, and to assist members with compliance.