The European Market Infrastructure Regulation is designed to bring some much-needed stability to the over-the-counter derivatives market, but disagreements about exactly what it is should cover are slowing its progress. It is looking increasingly unlikely that the EU will not meet the G-20 deadline.

What is it?

The European Market Infrastructure Regulation (EMIR), which sets out to increase stability within the over-the-counter (OTC) derivative markets. It is part of an international effort to tackle the problems with the OTC market highlighted during the financial crisis by the near-collapse of Bear Sterns in March 2008, the default of Lehman Brothers in September 2008, and the bail-out of AIG also in September 2008.

What are the main provisions?

The regulation introduces: a reporting obligation for OTC derivatives; a clearing obligation for eligible OTC derivatives; measures to reduce counterparty credit risk and operational risk for bilaterally cleared OTC derivatives; common rules for central counterparties (CCPs) and for trade repositories; and rules on the establishment of interoperability between CCPs.

The regulation facilitates within the EU the commitment made by G-20 leaders in Pittsburgh in September 2009, and sets in stone a delivery date of the end of 2012. Draft technical standards will have to be in place by June 2012.

What's in the small print?

An amendment has been added to extend the scope to listed as well as OTC derivatives and a disagreement about whether or not foreign exchange (FX) should be included, which has delayed the legislation. Another disagreement centres on access to CCPs and clearing. One stumbling block is the proposal that every CCP should allow everyone to connect to their services on a non-discriminatory basis. This is a serious issue for so-called vertical silos such as Deutsche Borse or NYSE Euronext, which often allow only their own platforms to connect.

What does the industry say?

Leave FX out of the mix. The Association for Financial Markets (AFME) and consultancy Oliver Wyman carried out research to identify exactly what risk FX markets present. It showed that the main risk in FX is around settlement, which accounts for about 92% of risk in transactions up to six months, while counterparty risk, which is what EMIR addresses, accounts for only 5% to 9% of the risk in a transaction. AFME used this research as part of the financial industry's case that FX should be exempt from the scope of EMIR. Both the council and the parliament versions of the draft EMIR legislation now refer to the difference between settlement and counterparty risk with regard to FX. But it has yet to be decided.

reg rage

What do the regulators say?

They are divided on several counts. It was the Hungarian presidency – which was leading negotiations on behalf of the Council of the EU at the time – which extended EMIR to both listed and OTC derivatives. Some members of European Parliament (MEPs), including Sharon Bowles, head of the Economic and Monetary Affairs (ECON) Committee in parliament, agree with the extended remit. Others, including Werner Langen, the German MEP, believe the EU should stick to the G-20’s original mandate, which focused purely on clearing standardised OTC contracts.

What about the deadline?

It looks increasingly tough for the EU to meet the G-20 deadline. According to Brussels insiders, Mr Langen has also rejected the so-called 'first reading' approach (under which a piece of legislation goes straight from the parliamentary committee to negotiations with council) stating that he wanted to follow the ordinary legislative procedure and take a final vote in the European Parliament’s plenary session before opening negotiations with the council (handing responsibility over to Poland, which will have assumed the presidency by then).

“This means a second reading of the text, after summer recess, and adds at least six months to the process,” says one national regulator. “This makes it very unlikely that the regulation could be adopted much before March 2012, and puts enormous pressure on the European Securities Market Authority [ESMA], to which the regulation then gets passed, to meet the June 2012 deadline for its draft technical standards. And this raises serious questions about whether the EU can meet the G-20 deadline.”

What are the unintended consequences?

According to the regulator, ESMA has begun preparatory work to flesh out the technical details in order to try to meet the deadline. However, it cannot finalise these until the regulation is agreed by both the Council of the EU and the parliament. “Formalising all the technical detail needed to put EMIR into action in the time it will have is impossible,” says the regulator, “and the postponement of a decision by ECON means ESMA will have to adjust its draft depending on how policy shifts as the negotiations proceed. This could be a disaster in terms of the quality of the technical standards.”

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter