European Union: Investment Firms Quarterly Legal And Regulatory Update - 1 January 2015 To 31 March 2015


(i) Update on implementation schedule for margin requirements for non-centrally cleared derivatives

The Basel Committee on Banking Supervision ("BCBS") and the International Organization of Securities Commissions ("IOSCO") released revisions to the framework for margin requirements for non-centrally cleared derivatives on 18 March 2015. The revised framework is available on the websites of the Bank for International Settlements and IOSCO.

Recognising the complexity of implementing the framework, the BCBS and IOSCO have agreed to (i) delay the implementation of requirements to exchange both initial margin and variation margin by nine months; and (ii) adopt a phase-in arrangement for the requirement to exchange variation margin.

Relative to the 2013 framework, the revisions delay the beginning of the phase-in period for collecting and posting initial margin on non-centrally cleared trades from 1 December 2015 to 1 September 2016. The full phase-in schedule has been adjusted to reflect this nine-month delay. The revisions also institute a six-month phase-in of the requirement to exchange variation margin, beginning 1 September 2016.

The BCBS and IOSCO will also liaise with industry as market participants continue their work to develop initial margin models that will be required to comply with the margin requirements. This engagement will help ensure that emerging quantitative initial margin models are consistent with the framework but will not provide an explicit review or approval of any initial margin model.

(ii) Pension funds to benefit from a further two year exemption from central clearing requirements

The European Commission published a report on 3 February 2015 that recommends granting pension funds a two-year exemption from central clearing requirements for their over-the-counter ("OTC") derivative transactions. The report, which is based on an extensive study requested by the European Commission, concludes that central counterparties ("CCPs") need this time to find solutions for pension funds. At the same time, the report encourages CCPs to continue working on finding technical solutions in this important matter. Ultimately, the objective is that pension scheme arrangements ("PSAs") should use central clearing for their derivatives transactions, as is the case for other financial institutions.

Under current arrangements, PSAs – which encompass all categories of pension funds – would have to source cash for central clearing. Given that PSAs hold neither significant amounts of cash nor highly liquid assets, imposing such a requirement on them would require very far-reaching and costly changes to their business model which could ultimately affect pensioners' income. Current EU law provides for a temporary exemption from the clearing obligation until August 2015.

A press release issued by the European Commission is available at:

(iii) ESMA publishes opinion on Draft Regulatory Technical Standards ("RTS") on the clearing obligation on interest rate swaps

As previously reported in our last update, ESMA submitted final draft regulatory technical standards ("IRS RTS") for the central clearing of Interest Rate Swaps ("IRS") for approval to the European Commission on 1 October 2014. The IRS RTS define those types of IRS contracts which will have to be centrally cleared, the types of counterparties covered by the obligation and the dates by which central clearing of IRS will become mandatory for them.

On 18 December 2014, the European Commission sent a letter to ESMA informing ESMA of its intention to endorse, with amendments, the draft IRS RTS, (the "Commission Modified RTS"). In the letter the European Commission outlined certain changes which it considers were necessary to the IRS RTS which included postponing the start date of the frontloading requirement, clarifying the calculation threshold for investment funds and excluding from the scope of the clearing obligation non-EU intragroup transactions.

On 30 January 2015, ESMA published an opinion (the "Opinion") on the IRS RTS in response to the European Commission's letter of 18 December 2014. ESMA supports the European Commission's intention to postpone the start date of the frontloading obligation, as this should give counterparties sufficient time to determine whether contracts are subject to frontloading. However, ESMA believes that the European Commission's proposals relating to third country intra-group reporting are not appropriate from a legal perspective. The Opinion contains a second version of ESMA's draft RTS on the clearing obligation (the "ESMA Modified RTS"). On 9 March 2015, ESMA published a revised opinion on its Modified RTS however, the revised opinion does not change the ESMA Modified RTS.

The European Commission may now proceed to adopt the ESMA Modified RTS with the amendments it considers relevant (which may involve, as regards one or more of the issues identified above, reinstating the approach taken in the Commission Modified RTS) or reject it. Any adoption by the European Commission of the RTS must simultaneously be notified by it to the European Parliament and the Council, who then have a three-month period in which to object to the RTS, extendible by a further three months (which periods are reduced to one month, where the adopted RTS is the same as the ESMA Modified RTS). In the absence of such an objection, the RTS adopted by the European Commission will be published in the EU's Official Journal and will enter into force on the date set out in the RTS (currently 20 days following such publication). However, if either the European Parliament or the Council objects, the RTS will not enter into force, thereby further delaying the start of mandatory clearing within the EEA. As there is no legislatively prescribed timeline for dealing with such an eventuality, the potential extent of any such delay is unclear. In light of these delays the earliest that the clearing obligation could come into effect for IRS is the end of 2015.

(iv) ESMA issues feedback statement on the central clearing of non-deliverable forwards

ESMA published a feedback statement on its consultation on the clearing obligation for non-deliverable forwards ("NDF") which it had to conduct under EMIR by 4 February 2015.

EMIR requires ESMA to draft technical standards regarding the clearing obligation of different derivative classes. This feedback statement summarises the responses received to the consultation.

Based on the feedback received, ESMA is not proposing a clearing obligation on the NDF classes at this stage. ESMA believes that more time is needed to appropriately address the main concerns raised during the consultation.

This decision is without prejudice to the possibility for ESMA to propose a clearing obligation on the NDF classes (by the submission of a final report to the European Commission including a draft RTS) at a later point in time in order to take into account further market developments.

(v) ESMA reviews CCP colleges under EMIR

On 8 January 2015, ESMA published a peer review report on its participation on the supervisory colleges established under EMIR to authorise and supervise EU-based CCPs.

The report is focused on the supervisory activities of competent authorities relating to the authorisation of CCPs under EMIR and is based on ESMA's experience in the initial phase of the college process, that is their establishment, their review of CPP authorisation applications, their review of the competent authorities' risk assessments, and their adoption of the joint opinions on CCPs authorisations. ESMA is a member of every college to ensure the consistent and correct application of EMIR.

(vi) List of CCPs authorised under EMIR

On 22 January 2015, ESMA added Athens Exchange Clearing House to its list of authorised CCPs under EMIR. The updated list of CCPs can be found at this link;

(vii) ISDA proposes recovery and continuity framework for central counterparties

On 26 January 2015, the International Swaps and Derivatives Association ("ISDA") published a position paper setting out a proposed recovery and continuity framework for CCPs. Owing to their systematic importance, CCPs are required to develop recovery plans to enable them to recover from a threat to their viability and financial strength and ensure that they can maintain the continuity of critical services without requiring the use of resolution powers by authorities or resorting to public money.

The proposed framework comprises the following elements:

  • Recovery measures;
  • Transparency and timing;
  • Appropriateness of utilising recovery measures beyond pre-funded resources;
  • Segregated clearing services;
  • Failure to re-establish a matched book;
  • Compensation for loss allocation; and
  • Condition for entry into resolution.

ISDA considers that the recovery of a CCP is preferable to its closure and believes that the proposed framework is comprehensive and will be effective.

(viii) Global Legal Entity Identity Foundation launches website

On 26 January 2015, the Global Legal Entity Identity Foundation ("GLEIF") published a press release announcing the launch of its website. The GLEIF was established by the Financial Stability Board ("FSB") and is overseen by the Regulatory Oversight Committee of the Global Legal Entity Identifier System ("LEI ROC").

During 2015, the website will enable market participants to access the authoritative database of all LEIs issued globally and associated reference data.

(ix) Implementation monitoring of the PFMI: Level 2 assessments for central counterparties and trade repositories in the European Union, Japan and the United States

The Committee on Payments and Market Infrastructures ("CPMI") and the IOSCO published three reports on selected jurisdictions' progress towards the implementation of the Principles for Financial Market Infrastructures ("PFMI") on 26 February 2015.

The reports focus on the implementation of the Principles (as contained in the PFMI) for CCPs and TRs in the European Union, Japan and the United States. The three Level 2 assessment reports are based on peer reviews of whether, and to what degree, the content of the jurisdiction's legal and regulatory or oversight framework is complete and consistent with the PFMI. CPMI and IOSCO consider the implementation monitoring exercise to be very important, not least given the increasingly significant role played by CCPs and TRs in the OTC derivatives market arising from the regulatory reforms agreed by the G20.

In each case, the assessment reflects the status of the jurisdiction's legal, regulatory and oversight frameworks as at 18 April 2014.

Overall, the reports demonstrate that the three jurisdictions have made good progress in implementing the Principles in their legal and regulatory or oversight frameworks. This is especially evident for CCPs, where the jurisdictions have generally developed frameworks that completely and consistently implement either all, or the majority, of the Principles applicable to systemically important CCPs. Jurisdictions' progress towards completely and consistently implementing the Principles for TRs has been more varied. Where appropriate, the reports highlight gaps and make recommendations for addressing them.

(x) Questions and Answers on the implementation of EMIR

ESMA published the 12th update to its Q&A for EMIR on 31 March 2015.

The revised Q&A includes further guidance on the authorisation of CCP services, the clearing obligation and the RTS on direct, substantial and foreseeable effect of contracts within the Union.

The updated Q&A can be found at this link:

To read this Update in full, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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