EMIR Regulatory Technical Standards Remain Under Threat

Introduction

Further to our blogpost of 22 January 2013, Risk Magazine is now also confirming that, on 4 February, the EU Parliament is set to vote down two of the EMIR regulatory technical standards drafted by ESMA.

It is reported that concerns relate to the following technical standards:

• “Regulatory technical standards on indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, risk mitigation techniques for OTC derivatives contracts” (the “Risk Mitigation RTS”), and
• “Regulatory technical standards on requirements for central counterparties” (the “CCP RTS”).

Broadly speaking, the objections are as detailed below.

The Clearing Threshold

Article 10(4)(b) of EMIR requires that clearing thresholds should take into account “the systemic relevance of the sum of net positions and exposures per counterparty and per class of OTC derivatives”.  However, the Risk Mitigation RTS define the clearing threshold by reference to “gross notional” values of OTC derivatives.  This makes it much more likely that the thresholds will be exceeded in practice and, it is argued, more likely to trigger at a level below that consistent with the concept of “systemic relevance” as required by Article 10 of EMIR.

Bank Guarantees

Article 46(1) of EMIR states that, with respect to non-financial counterparties, “a CCP may accept bank guarantees, taking such guarantees into account when calculating its exposure to a bank that is a clearing member”.  However, annex 1 section 2(1)(h) of CCP RTS seems to demand additional requirements, stating that a commercial bank guarantee must be “fully backed by collateral that…is not subject to [non-mitigated] wrong way risk”, is “bankruptcy remote” and to which the CCP has “prompt access”.  This, it is claimed, makes it virtually impossible for non-financial counterparties to use bank guarantees in practice.

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