Update on the EU Derivatives Market

Philipp Rosenauer Partner Legal, PwC Switzerland 05 Feb 2019

On 31 January 2019, ESMA published a statement addressing the implementation of EMIR requirements that may be repealed by EMIR Refit.

The statement addresses the clearing and trading obligation requirement, from which small financial counterparties might be exempted. Furthermore, it discusses the backloading requirement for reporting entities that could be cancelled by EMIR Refit. 

However, the EMIR Refit negotiations have not been finalised. This is leading to increased uncertainty on the market regarding how to deal with the issues.

You can find our EMIR article from 2018 here.

Clearing and trading obligations for small financial counterparties

Given that the Refit negotiations have not been finalised, there could be a timing mismatch. Small financial counterparties (i.e. counterparties, whose derivative positions are below the clearing thresholds) would need to have clearing arrangements in place and start clearing their derivative contracts, before they are once again no longer required to do so once Refit comes into force.

Furthermore, MiFIR exempts financial counterparties, temporarily exempted under EMIR from the clearing obligation, from the trading obligation for derivatives. With the expiration of the current Category 3 clearing obligation phase-in under EMIR, the relevant counterparties would hence also be subject to the trading obligation under MiFIR for those OTC derivative contracts.

ESMA is aware of challenges that certain small financial counterparties would face in preparation for the 21 June 2019 deadline, to start CCP clearing and trading some of their OTC derivative contracts on trading venues. 

Backloading  requirement for reporting entities

To meet regulatory requirements and to reduce the substantial and costly adjustments that reporting entities need to make to comply with the backloading requirement, EMIR Refit is likely to remove the backloading requirement from Article 9 of EMIR.

As the EMIR Refit negotiations have not been finalised yet, ESMA is addressing the backloading requirement with respect to the reporting obligation.

ESMA indications

ESMA does not have the formal power to disapply EU legislation or to extend deadlines. However, it expects national competent authorities (“NCA’s”) to apply their risk-based supervisory powers in a proportionate manner with regard to the abovementioned obligations. This may include not prioritising these obligations in their day-to-day supervision and enforcement of EMIR.

Let us assist you in analysing the potential impact of EMIR Refit on your organisation and in preparation for the changes brought about by EMIR Refit, through a high-level impact assessment, a gap assessment and implementation support. 

You can find the full statement here.

 

Contact us

Martin Liebi

Martin Liebi

Director, Legal, PwC Switzerland

Tel: +41 58 792 28 86

Silvan Thoma

Silvan Thoma

Director, Legal FS Regulatory & Compliance Services, PwC Switzerland

Tel: +41 58 792 1817