EMIR: New Opportunities and Challenges for European Derivatives Markets

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The European Market Infrastructure Regulation (EMIR) came into force in the EU late last year as part of the worldwide effort to reduce counterparty and operational risk in the over-the-counter (OTC) derivatives market. Last Friday, the implementation of the technical standards of EMIR was initiated, and a long list of requirements now needs to be complied by the end of 2014.

EMIR will increase the stability of the European derivatives market by establishing reporting and clearing requirements for all OTC derivatives contracts transacted in the EU—namely interest rates, credit, foreign exchanges, commodities, and equity derivatives. Within the next six months, trade repositories as well as central counterparties that currently provide clearing services in the EU will need to apply for authorization from the European Securities and Markets Authority (ESMA). National regulators have one month to notify ESMA of the central counterparties they’ve authorized and the derivatives classes already cleared by central counterparties in their jurisdiction. ESMA will also be responsible for identifying and approving the contracts that need to be cleared and recommending appropriate clearing thresholds.

Given the time it will take to authorize the various central counterparties and trade repositories, firms probably won’t be expected to clear their transactions until early 2014. Nevertheless, it looks like both financial and non-financial institutions are struggling to meet the compliance deadlines.

All firms must be prepared to report credit and interest rate derivatives contracts to trade repositories by July 1 of this year, and all other asset class derivatives contracts will need to be reported to them by January 1, 2014. This means that processes must be put in place within the next three months to ensure the timely confirmations of daily valuations and transactions. However, with so many different regulations to juggle this year—AIFMD, Dodd-Frank, the new UK regulatory regime, FATCA, and dozens of other regulatory proposals, three months is really no time at all.

According to PricewaterhouseCoopers in London, the information that all parties will be required to report to trade repositories is almost three times what is currently reported to regulators. Moreover, the type of data required is incredibly granular, and firms will probably need to pull data from several IT firms. Since some of that data will also need to be input manually on or near the time of trading, significant training will also be required for the trading and operational staff at these firms.

In the meantime, the major players in Europe’s OTC clearing market are preparing themselves for a huge influx of business, especially with regard to interest rate swaps, the largest of the three main OTC markets in Europe.

CME has already set up its own clearing service, CME Clearing Europe. So too has the London Metals Exchange (LME), which just launched LME Clear last week. NYSE Euronext is still in the process of developing its own clearing business, NYSE Liffe Clearing, while Deutsche Börse’s clearing house, Eurex Clearing, plans to take on LCH.Clearnet over interest rate swaps with the launch of its new product, EurexOTC Clear, which should launch in July.

On the reporting side, NASDAQ OMX Clearing and Deutsche Börse have both established reporting services to handle EMIR derivative reporting for their members.

ZE recently hosted a webinar in partnership with Willis Group Consulting on how the ZEMA suite can help firms manage new reporting requirements to comply with the Dodd-Frank Act. With more than 15 years of ETLP (Extracting, Transforming, Loading and Publishing) experience in the Energy and Commodity market and the ability to integrate various client systems (legacy, commercial, in-house) with a variety of E/CTRM systems, ZEMA is now a best-in-class solution to help you stay on top of these ever-changing reporting obligations.

Feel free to contact us to find out more on how we can assist you with your complex data requirements.


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