On May 4, the European Commission (EC) proposed reforms (Proposal) to the European Market Infrastructure Regulation (EMIR). The Proposal aims to provide simpler and more proportionate rules for over-the-counter (OTC) derivatives to reduce costs and regulatory burdens for market participants without compromising financial stability.
The main proposed changes to EMIR in the Proposal relate to the following:
- Reporting requirements: Reporting requirements are being streamlined for all counterparties. Exchange-traded derivatives will only be required to be reported by the central counterparty (CCP) on behalf of both counterparties. To reduce the burden for all non-financial counterparties (NFCs), intragroup transactions will not have to be reported if one of the counterparties is an NFC. To reduce the burden for small NFCs (an NFC below the EMIR clearing threshold), transactions between a financial counterparty and a small NFC will be reported by the financial counterparty on behalf of both counterparties. Reporting on historic transactions will no longer be required.
- NFCs: In the future, only non-hedging contracts will be counted towards thresholds triggering the clearing obligation. While under the current rules, NFCs must clear all derivatives if they exceed the clearing threshold for one class of derivatives; the EC is now proposing that NFCs clear only the asset classes for which they have breached the clearing threshold.
- Financial counterparties: The Proposal introduces a clearing threshold for small financial counterparties. This clearing threshold is based on the volume of OTC derivatives transactions. While all financial counterparties are required to report and collateralize OTC derivative transactions, only counterparties exceeding that threshold would be required to clear centrally.
- Pension funds: The Proposal introduces a new three-year temporary exemption for pension funds from central clearing. This is designed to allow the various counterparties involved, including pension funds, CCPs and the clearing members, to develop a solution that enables pension funds to participate in central clearing without negatively impacting the revenues of future pensioners.
The EC states that the changes include measures that could save market participants, and in particular corporates such as energy companies or manufacturers, up to €2.6 billion in operational costs and up to €6.9 billion in one-off costs. The Proposal will become effective once the European Parliament and Council have approved them.
A copy of the Proposal is available here.