European Union: Update On Third Country Equivalence Under EMIR

The European Commission has adopted an "equivalence" decision on the derivatives regulatory regimes for derivatives clearing organisations in the United States. This follows the decisions adopted in November 2015 for Canada, Mexico, the Republic of Korea, South Africa and Switzerland and in October 2014 for Australia, Hong Kong, Japan and Singapore. Further decisions are awaited for other jurisdictions and for other derivatives regulatory requirements. This paper summarises the equivalence decisions and technical advice that has been produced to date.

Introduction

Under the European Market Infrastructure Regulation ("EMIR")1, the European Commission may adopt implementing acts declaring that the legal, supervisory and enforcement arrangements of a non-EU country are equivalent to the requirements in EMIR2. Such a decision is necessary for a central counterparty ("CCP") or trade repository ("TR") established in a non-EU country to provide their services in the EU. EMIR also requires equivalence decisions to be issued in respect of other obligations. These are relevant in circumstances where one of the counterparties to a trade subject to EMIR is established outside the EU, as an equivalence decision would permit both counterparties to comply with the non-EU country's equivalent regime instead.

Under EMIR the European Commission may request the European Securities and Markets Authority ("ESMA") to provide technical advice as to the equivalence of some non-EU jurisdictions which host major derivatives markets or CCPs which have applied for recognition. ESMA's assessment is a factual comparison of the rules in the relevant jurisdiction with the EU rules and advice to the Commission on how any differences might affect an equivalence decision or could be incorporated into an equivalence decision. The scope of the advice covers the recognition of non-EU CCPs and TRs, the clearing obligation, reporting obligation, non-financial counterparties ("NFCs"), portfolio reconciliation, dispute resolution, portfolio compression and margin requirements.

The Commission's equivalence decision will be based on ESMA's advice and an assessment of the outcomes of the third country's rules, including whether the rules mitigate any risks faced by market participants in the EU to the same extent that the EMIR rules are intended to do so. The trading volumes in a jurisdiction can be relevant to an assessment of the risks posed to clearing members of a third country CCP. Those CCPs with larger trading volumes operating in larger financial markets will need to be subject to more rigorous risk mitigation requirements than those operating in smaller financial markets.3

US Equivalence

On 10 February 2016, the European Commission and the Commodity Futures Trading Commission ("CFTC") announced a common approach on the supervision of CCPs operating in the US and EU (the "Common Approach").4 The agreement was necessary because key differences between the EU and US regimes had been preventing the Commission from adopting an equivalence decision for the US. Notably, the crucial discrepancy on minimum liquidation periods5 has been resolved - the EU liquidation period for exchange-traded futures contracts must be at least two business days whereas in the US it is one day and for customer positions, EU rules provide that clearing members may post margin on a net basis whereas the US rules require clearing members to post margin on a gross basis.

The European Commission has now adopted an equivalence decision.6 The decision mirrors the stipulations set out in the Common Approach. The equivalence decision declares that the legal and supervisory arrangements of the CFTC for derivative clearing organisations ("DCOs") that have been declared systemically important derivatives clearing organisations ("SIDCOs") by the Financial Stability Oversight Council or DCOs that have opted into additional standards similar to the SIDCO regime (so-called "Subpart C DCOs") are equivalent to the EU requirements under EMIR, provided that the DCO's internal rules and procedures meet the following requirements:

  • For derivatives contracts executed on regulated markets, a minimum liquidation period of two days for initial margin is applied to clearing members' proprietary positions;
  • For all derivative contracts, measures are in place to limit procyclicality which are equivalent to the options under EMIR;7  and
  • The DCO has sufficient pre-funded available resources enabling it to withstand the default of at least two clearing members to which it has the largest exposures under extreme conditions.

The equivalence decision provides that these additional conditions will not apply to US agricultural commodity derivatives traded and cleared domestically within the US, in light of the nexus of these contracts with the US economy, the importance of the contracts to US agricultural providers and the low degree of systemic interconnectedness of agricultural products with the rest of the financial system.

The CFTC is responsible for oversight of derivative contracts other than those based on a single security (a bond or share) or loan or narrow-based index of securities (which are subject to the oversight of the Securities and Exchange Commission ("SEC")). US CCPs that provide clearing services for those derivatives contracts that fall within the remit of the SEC are not covered by the equivalence decision. If a US CCP provides clearing services for derivatives under the purview of both the CFTC and the SEC, the decision relates only to those services that fall within the CFTC's jurisdiction.

Margin for Customer Positions

The equivalence decision also states that the US rules on margin for customer positions are equivalent to the EU rules. The Commission has determined that although the details of the US rules differ with those of the EU rules, the outcomes are equivalent. EU rules require margin for customer accounts to be collected on a net basis whereas the US rules require it to be collected on a gross basis. According to the Commission, the difference between the net and gross margin collection results in the same outcomes "which compensates for the difference in the liquidation period."

ESMA published proposals in December 2015 to amend the liquidation period for customer positions to allow for one day gross margin to be posted provided that certain conditions were met, including that the identity of the client is known to the CCP, the client is not an affiliate of a clearing member and the CCP implements procedures to: (i) calculate for each account, initial and variation margin requirements at least every hour during the day; and (ii) collect margins within one hour where the new margin requirement meets certain thresholds. Considerable industry concern was expressed in response to ESMA's proposals, including that the conditions are not required under the US rules.

Recognition Under EMIR

SIDCOs and Subpart C DCOs may therefore apply to ESMA for recognition under EMIR but will need to show that their internal rules and procedures meet the requirements set out above to obtain recognition. Following the announcement of the EU-US agreement in February 2016, ESMA announced that it will do everything in its powers to shorten the 180 day period that it has to make a recognition decision for CCPs under EMIR. The impetus for this approach is the incoming clearing obligation for certain IRS entered into with an EU counterparty. As a result, it seems likely that those DCOs that clear IRS may have their applications for recognition prioritized over the applications of other DCOs. Although ESMA has committed to act speedily, the DCOs may also need to implement changes to their rules and procedures to ensure that the additional requirements for recognition are met.

US Comparability Determination

Consistent with the Common Approach, the CFTC adopted, on 16 March 2016, its own substituted compliance determination for DCOs that are also EU CCPs. According to the determination, an EU CCP could comply with the EU requirements on financial resources, risk management, settlement procedures and default procedures instead of the CFTC requirements. Such substituted compliance will be available to EU CCPs that are currently registered as DCOs as well as EU CCPs seeking to become registered as DCOs. The CFTC staff has also clarified that certain CFTC requirements will not apply to non-Futures Commission Merchant clearing members (and their customers) of EU CCPs that are DCOs.

To continue reading this article please click here.

Footnotes

1 Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories.

2 You may like to read our client note, "Extraterritoriality Revisited: Access to the European Markets by Financial Institutions, Funds and Others from Outside Europe," available here. The note sets out the requirements for non-EU entities to gain access to the EU markets under various European legislative requirements.

3 For example, the equivalence decision for South Africa notes that over the past three years, the total value of derivatives cleared in South Africa was less than 1% of the total value of derivatives cleared in the EU.

4 You may like to see our client note, "EU-US Agreement on Regulation of Central Counterparties," dated 16 February 2016, available here.

5 A liquidation period is the time period used for the calculation of the collateral that the CCP estimates is necessary to manage its exposure to a defaulting member. Essentially, a CCP examines the maximum predicted possible price movement over the liquidation period to calculate a baseline figure for initial margin.

6 The decision was published in the Official Journal of the European Union on 16 March 2016 and is available here.

7 EMIR provides for the following options: a) applying a margin buffer at least equal to 25 % of the calculated margins which it allows to be temporarily exhausted in periods where calculated margin requirements are rising significantly; (b) assigning at least 25 % weight to stressed observations in the lookback period calculated under EMIR; (c) ensuring that its margin requirements are not lower than those that would be calculated using volatility estimated over a 10 year historical lookback period.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Barnabas W.B. Reynolds
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.