Context:
The European Commission is reviewing Regulation (EU) n°648/2012 of 4 July 2012 on OTC derivatives, central counterparties and trade repositories aka European Market Infrastructure Regulation (“EMIR”).
Pursuant to article 85 of EMIR, the European Commission published its report assessing in particular the effectiveness of the supervision, the efficiency of risks mitigating measures, the systemic importance of the transactions of non-financial counterparties (“NFC”) and the impact of the regulation on the use by these counterparties of OTC derivatives.
This review is a unique opportunity to establish a more proportionate regime for NFC in the context of the Action Plan for a Capital Market Union and following the Call for evidence on the cumulative impact of regulations on financial services and markets.
Key issues
NFC use derivatives to hedge operational risks and should not be imposed additional constraints
The use of OTC derivatives by non-financial companies was not the cause of the financial crisis and should not be seen as increasing risk in the financial system.
As mentioned by ESMA in its report published in 2015[1], NFC represent 72% of the number of counterparties but account only for 2% of the notional value of the OTC derivatives markets. NFC don’t represent any systemic risk. EMIR should not be amended and its scope extended to include a limited number of NFC+ while the impact of such changes would be disproportionate for thousands of companies.
It is therefore essential to maintain a differentiated approach taking into consideration the nature of non-financial companies and of their activities, in particular the fact that NFC are exposed to risks arising from their activities.
Adding more constraints on the use of derivatives for NFC- would in particular increase the costs of hedging transactions and produce significant negative impacts on companies and real economy. The current exemption for hedging activities should therefore be maintained.
As regards the clearing thresholds per class of OTC derivatives, EMIR should be amended in order to avoid, when a clearing threshold is reached for a specific class of OTC derivatives, triggering a clearing obligation for all other classes of OTC derivatives.
Has reporting gone too far?
Reporting of OTC derivatives transactions has allowed NFC to implement procedures and strengthen their risks controls. Reporting requirements and risks mitigation techniques have also contributed to structure transactions on OTC markets. However, whether the reporting requirement has achieved its goals is questionable.
Companies consider that intragroup transactions where one counterparty is a NFC should be exempted of the reporting requirement: such reporting does not bring added value in terms of supervision since risks would be assessed at a consolidated level and is burdensome to implement (an LEI is required for each reporting entity, for instance).
Companies also support moving from a double-side reporting to a single-side reporting where the reporting requirement would apply to the Financial Counterparty:
Double-side reporting raises issues in terms of liability and does not guarantee the quality of data reported.
Delegated reporting is not a solution.
Trading derivatives is not NFC’s main business and they should not be subject to reporting requirements.
Financial Counterparties are better equipped to ensure a swift an efficient reporting.
Considering the lack of interoperability and the absence of reconciliation between Trade Repositories (same transactions can be reported to different TR), improvement of data quality will not be achieved through a double-side reporting but, for non-cleared OTC derivatives, through reconciliation of portfolios between counterparties.
Other Jurisdictions have adopted a single-side reporting regime (Canada, Japan, the USA and Switzerland).
Companies support removing the so called “backloading” and “frontloading” obligations. They also support introducing a mechanism to temporarily allow suspension of clearing obligations under certain conditions and more transparency in the methodologies used by CCP to calculate margin requirements.
[1]« Review on the use of OTC derivatives by non-financial counterparties » (ESMA/2015/1251)