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Wednesday
Jun272012

3 quarter time in the regulation of OTC's

David Lawton from the UK FSA recently gave a speech setting out the status of OTC regulation.  He described the process as being a "third quarter update" given that a previous speaker from the FSA had said they were at the half way point about a year ago.

In Ozzie Rules Football, this writer's favourite weekend spectator sport, three quater time is crucial.  If the match wasn't won or lost already, then it now comes down to one last effort to get a result.  Players are tired, skill levels drop, desire and heart take over.

Suffice to say that OTC regulation just doesn't have the same excitement factor, but it will be much more important.  A lot regarding OTC is yet to be resolved, particulary from the US perspective and the ongoing drama over the CFTC and Dodd Frank.  However, one thing that is clear is that the OTC regulatory game is coming to an end on both sides of the Atlantic.  Whether participants want it or not, the G20 said that regulators would play the game of drafting global rules and they are coming to the end of that game, with the likely result being global regulations that will touch on substantial elements of the global financial system.

The final quarter thus begins with ESMA issuing a consultation paper on technical rules to be issued with respect to the OTC system.  ESMA are key to the process.  So far they have issued more sensible rules than the US - albeit that broadly the writer is not convinced that any of the rule making is entirely sensible - and the position they ultimately take will (or hopefully will) have the effect of crafting a global standard for derivatives clearing, trading, reporting and margins.

The consultation is due on August 5.

The big question in this G20 game is whether there will be a winner.

The press release by ESMA stated as follows:

ESMA proposes rules on derivatives, central counterparties and trade repositories


The European Securities and Markets Authority (ESMA) has launched a consultation on its technical standards under the Regulation on OTC derivatives, central counterparties and trade repositories (EMIR), which is aimed at improving the functioning of OTC derivatives markets in the European Union (EU).


EMIR aims to achieve this by reducing risks via the use of central clearing and risk mitigation techniques, increasing transparency via trade repositories (TR) and ensuring sound and resilient central counterparties (CCPs).


The implementation of EMIR is a key element in the EU’s programme to meet the G20 commitments of strengthening the global financial regulatory system and ensuring sounder and more resilient markets.

Steven Maijoor, ESMA Chair, said:


“OTC derivatives impact both financial markets and the real economy but have not been subject to regulatory requirements. This absence has resulted in negative consequences for financial markets, investors and the real economy.


“The draft technical standards developed by ESMA set out the measures for the implementation of the regulatory framework established under EMIR. These measures will ensure that EMIR’s objectives of reducing risks arising from OTC derivatives, improving transparency and ensuring sound and resilient central counterparties will be applied in practice.


“These proposals will contribute to enhancing the protection of investors and promote stable and well-functioning financial markets in the EU, and allow the EU to play its role in strengthening the global financial regulatory system.”


The Consultation Paper contains draft Regulatory Technical Standards (RTS) and draft Implementing Technical Standards (ITS) which set out the specific details of how EMIR’s requirements are to be implemented. The requirements set out in the draft technical standards will ensure:


Reduction of counterparty risks by:


· Defining the framework for the application of the clearing obligation;
· Specifying the risk mitigation techniques for OTC derivatives not centrally cleared;
· Laying down the requirements for the application of exemptions to non-financial counterparties and intragroup transactions.


Safe and resilient CCPs by:


· A comprehensive set of organisational, conduct of business and prudential requirements for CCPs.


Increased transparency by:


· Specifying the details of derivatives transactions that need to be reported to trade repositories;
· Defining the trade repositories’ data to be made available to relevant authorities;
· Setting the information to be provided to ESMA for the authorisation and supervision of trade repositories.

ESMA’s Consultation Paper is based on the EMIR texts as adopted by the European Parliament on 29
March 2012 and by the Council on 11 April 2012.


The consultation closes on 5 August 2012 and the final draft standards are intended to be submitted to the
EU Commission for endorsement by 30 September 2012.


ESMA will hold a public hearing on 12 July 2012 in Paris and registration is open to all interested participants

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