Financial Services Fireside Friday - EMIR Part II

5 April 2012

Contacts

Jonathan Herbst, Hannah Meakin and Simon Lovegrove

Transcript

Interviewer (Simon Lovegrove): Hello there and welcome to the latest Financial Services Fireside Friday video. In this Fireside Friday video we take a further look at the European Market Infrastructure Regulation, otherwise known as EMIR. Recently the European Parliament has reached agreement with the Council of the European Union on the text of the Regulation and it’s now for lawyer linguists to finalise the wording. Hannah, just to start off can we just remind people what the core obligations are under EMIR.

Interviewee (Hannah Meakin): Yes of course, there are three main obligations. Firstly, the obligation to clear OTC derivatives through a central counterparty, that’s OTC derivatives that have been listed on ESMA’s register and through central counterparties that have either been authorised or recognised by ESMA. The second obligation is various risk management obligations in relation to OTC derivatives that don’t need to be cleared through a central counterparty. So that includes things like mark to market, timely confirmations and the exchange of collateral. And the third obligation is a reporting obligation so when any kind of derivative is entered into it needs to be reported to a trade repository or if there isn’t one for a particular asset class then to ESMA itself.

Interviewee (Jonathan Herbst): I think the big issue is going to be the timing of all of this. I mean ESMA’s got to go back by the end of September with its final advice but I think in reality, although we’re looking in theory at the end of the year as the time when all of this comes into effect, it’s actually going to be a slightly slower burn because each specific derivative type is going to need to go through consultation top-down approach and we’re going to actually have a rather slower process. So I think there’s going to be a staging of some sort but I think people should still think, and correctly think, this is going to be, you know, pretty much the end of the year, give or take a few months.

Interviewer (Simon Lovegrove): And the text which has been finalised is very familiar to those who have been tracking the legislation because it follows the political agreement reached on the 9 February and the debate has moved on now to the regulatory technical standards. Hannah, do you want to tell us a little bit more about the papers, say, that ESMA’s published so far.

Interviewee (Hannah Meakin): There have been three papers published by various European supervisory authorities. The first one by ESMA which set out their initial thoughts on some of the technical standards, not all of them unfortunately so there are some technical standards where we don’t have any idea what ESMA is thinking, although now that people have responded to those papers, we are beginning to see some of the industry’s ideas. The second paper was published by the three European Supervisory Authorities jointly and that one talks about the risk management obligations for OTC derivatives that aren’t cleared, in particular the bilateral collateralisation obligations. And then the third paper was published by the European Banking Authority and that one focuses on capital requirements for central counterparties. In all three cases those were discussion papers and the authorities are intending to publish a consultation paper which sets out the draft legal text of the technical standard, they don’t give exact timings but we think those should be published in about the summer.

Interviewer (Simon Lovegrove): And do you feel Jonathan the papers give us any clue for firms, you know, trying to implement their EMIR implementation plans?

Interviewee (Jonathan Herbst): Well, they do in some areas but they also raise a lot of questions. I mean, for example, for non-financial counterparties they effectively look at a pretty tough test for when a trade would be outside the obligation, hedging and they make clear, for example, that they’re looking at a very low threshold as to when a counterparty would trigger the full set of obligations so that’s one area where we think we know where they’re moving but there are others where it’s not so clear.

Interviewer (Simon Lovegrove): Taking a step back now, international harmonisation and cross-border issues are still causing significant concern amongst the industry. And I think it’s important you step back because EMIR implements the G20 commitment from the Pittsburgh summit. It’s somewhat of a moving feast; do you want to give us an update on the latest position?

Interviewee (Jonathan Herbst): I mean in terms of the global side it’s a very mixed picture indeed and there are all of the Dodd-Frank developments in the US. Some jurisdictions outside Europe and the US have also begun to do things, for example Singapore has brought out a consultation on this. But I think it’s fair to say the Financial Stability Board was fairly sceptical of progress in most of the world so that’s one thing to say. I think the second area which is the really sensitive issue between US and Europe for example is the whole question of equivalence. Now obviously buried in the text is the concept of equivalence in terms of whether, you know, clearing through a CCP, for example, in the US will be viewed as equivalent and the question will be how that test is actually applied. I think maybe there’s more to say on equivalence?

Interviewer (Hannah Meakin): Yes there are a couple of areas where equivalence comes into EMIR. Firstly, as Jonathan touched on it may be that you’re trading an OTC derivative that actually falls within two different regimes, both the European regime and another one and one of the provisions that went into EMIR at a relatively late stage tries to provide for that by saying that if that other regime has been considered by the European Union as equivalent to the European regime then you should be deemed to be in compliance if you comply with the other regime. The other area where this comes in is to do with whether a derivative that is entered into by two counterparties, either one of which is outside the EU or both of which are outside the EU, would fall within the scope of the European clearing obligation and that could be the case if, for example, that derivative has a direct substantial and foreseeable effect in Europe or if there are other reasons to think that you could be avoiding the requirements of EMIR. And this was actually one of the technical standards the ESMA didn’t provide any initial views on so we don’t really know how that’s going to pan out.

Interviewer (Simon Lovegrove): And Jonathan you mentioned earlier there’s going to be an awful lot of information coming out during the rest of this year, what have we created to help firms keep on top of what’s coming out?

Interviewee (Jonathan Herbst): Well we’ve created a new product very similar to Pegasus for MiFID but a similar product for EMIR which is going to deal with all the primary resources and also in due course our precedents and templates so that’s really the aim because it is going to be a very complicated process to keep an eye on.

Interviewer (Simon Lovegrove): And there’s also a cross-border element to it as well isn’t there?

Interviewee (Hannah Meakin): Absolutely, we’ve got colleagues from Asia, in particular Hong Kong and Singapore and also Canada and various other offices working on providing information and materials for that website as well so that we can make sure that we’re really looking at the cross-border elements.

Interviewer (Simon Lovegrove): OK, that concludes this Financial Services Fireside Friday, catch us next time, bye-bye.

Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members (“the Norton Rose Fulbright members”) of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients. This publication was produced prior to 3 June 2013 when Fulbright & Jaworski LLP became a member of Norton Rose Fulbright Verein.

References to “Norton Rose Fulbright”, “the law firm”, and “legal practice” are to one or more of the Norton Rose Fulbright members or to one of their respective affiliates (together “Norton Rose Fulbright entity/entities”). No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose Fulbright entity (whether or not such individual is described as a “partner”) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of the relevant Norton Rose Fulbright entity.

The purpose of this communication is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on the points of law discussed. You must take specific legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Norton Rose Fulbright.