At the G-20 Pittsburgh Summit in September 2009, the leaders of the 19 biggest economies in the world and the European Union agreed that "all standard OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest" and they acknowledged that "OTC derivative contracts should be reported to trade repositories and that non-centrally cleared contracts should be subject to higher capital requirements". The regulation of the OTC derivatives market has also been the subject of review by international regulatory organisations such as the International Organisation of Securities Commission (IOSCO) and the Financial Stability Board (FSB).
Both the US (Dodd Frank Act) and Japan (Financial Instruments and Exchange Act) passed OTC derivatives legislation earlier this year and the Hong Kong Monetary Authority and the Hong Kong Securities and Futures Commission are currently consulting on proposals to regulate the Hong Kong OTC derivatives market. The European Union's response in this area is contained in the Regulation on OTC derivatives, Central Counterparties and Trade Repositories ("EMIR") which was published in the Official Journal of the European Union on 27 July 2012. EMIR will implement the G20 commitments on OTC derivatives markets in the EU.
Although the overall approach in the EU and US is broadly similar, there are, however, certain differences of which market participants should be aware. These differences in approach may lead to the possibility of regulatory arbitrage.
EMIR came into force 20 days after its publication (i.e. on 16 August 2012). As EMIR is a Regulation it is directly applicable in all EU Member States. This means that no national measures are required to implement its requirements. However, as noted below, implementation will be gradual as there are a significant number of implementing measures required before EMIR will become fully operative.
SCOPE OF EMIR
EMIR aims to improve the functioning of OTC derivative markets in the EU by (i) increasing transparency via trade repositories; (ii) reducing counterparty risks; and (iii) ensuring safe and resilient central counterparties ("CCP").
EMIR has the capacity to apply to anyone who trades derivatives, whether on an exchange or otherwise and whether within or outside the EU. It is likely to apply to banks, insurance companies, collective investment schemes (and their managers), alternative investment funds (and their managers) and MiFID authorised investment firms. It will also be relevant for those entities which may seek to be authorised as a trade repository or as a CCP. In particular, asset managers who use derivatives in their portfolios should be aware of the requirements relating to the mandatory reporting of OTC derivatives to trade repositories.
On 25 June 2012, the European Securities and Markets Authority ("ESMA") published a consultation paper concerning the technical standards that it is required to produce under EMIR. The technical standards contain key information relating to how EMIR will apply in practice. ESMA must submit final technical standards to the European Commission (the "Commission") by 30 September 2012, after which the Commission will have three months to adopt the final technical standards. It is intended that the technical standards will be introduced by means of a number of Regulations to deal with the following matters:
Technical Standards for OTC derivatives These standards will include...