Financial Services Europe And International Update - March 2012

Author:Mr Martin Day and Richard Frase

Regulatory Developments

This update summarises current regulatory developments in the European Union and the UK focusing on the investment funds and asset management sectors, during the past three weeks.

EU Regulatory Developments

EMIR Update

As mentioned in our previous DechertOnPoint (February 2012/Issue 3), after nearly four months of trialogue meetings, agreement has finally been reached on the EMIR proposal.

The agreement includes the following elements:

all OTC derivatives contracts must be cleared through central counterparties, to reduce counterparty credit risk; all derivatives contracts (listed and OTC) must be reported to trade repositories, which will publish aggregate positions by class of derivatives, to provide market participants with an overview of the derivatives market; ESMA will have responsibility for the registration and supervision of trade repositories as well as a role in relation to disputes between national authorities on CCP authorisation; a less onerous regime will apply to pension schemes with regard to the clearing obligations, and will initially apply for three years but can be extended; third-country CCPs will be recognised in the EU if the legal regime in the third country provides for an effective equivalent system of recognition; the implementation of the Regulation will be evaluated (no longer than three years after its entry into force) to assess the effectiveness of the CCP supervisory framework, including the role of the colleges and of ESMA; The European Parliament is now expected to consider EMIR formally in its plenary session from 28 to 29 March 2012.

Final European Union Council agreement is also required before the legislation can come into force (twenty days after it has been published in the Official Journal);

ESMA was planning to produce many of the implementing measures for EMIR by the end of June 2012. Concerns were expressed by industry at this very tight deadline, with a three month extension now secured so that the deadline is now 30 September 2012. The financial sector has regularly stressed that the priority should be for robust and efficient regulation, which it believes should take precedence over the need to adhere to a strict deadline, which mirrors concerns expressed by ESMA itself at the tight deadlines for implementation of EMIR.

On 17 February 2012, the European Securities and Markets Authority ("ESMA") published a discussion paper on draft technical standards for the regulation on the OTC derivatives, CCPs and trade repositories provisions of EMIR. The paper seeks views on the regulatory and implementing technical standards ESMA is required to draft under EMIR as agreed at the trialogue meeting held on 9 February 2012. A joint discussion paper on regulatory technical standards is also expected from the EBA, EIOPA and ESMA in the next few weeks. This will focus on risk mitigation techniques for OTC derivatives that are not cleared by a CCP. A discussion paper on draft regulatory technical standards on capital requirements for CCPs is also expected to be published by the EBA shortly. Responses to ESMA's discussion paper close on 19 March 2012.

On 24 February 2012, the Council of the European Union announced it has adjusted its general approach on the proposed provisions on OTC derivative transactions, CCP and trade repositories, having agreed to this at a meeting of ECOFIN. This is designed to help the Council reach rapid agreement with the European Parliament, and enable EMIR to be adopted at its first reading.

The principal change to the Council's previous general approach (which was agreed in October 2011) relates to the procedures for authorising CCPs. In particular, it concerns the powers of the CCP's home member state and those of the college of supervisors and ESMA. The European Parliament has been arguing for a stronger role for the college and ESMA and the Council has now approved a proposal by the Council Presidency that would introduce two additional safeguards:

following a negative opinion of the college, with "unanimity minus one", the CCP's home member state can refer the matter to ESMA for binding mediation; and when a "sufficient" majority in the college opposes authorisation of a CCP, this majority may then decide to put the issue to ESMA for binding mediation. (The Council's position defines a sufficient majority...

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