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EU rules on derivatives contracts

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EU rules on derivatives contracts

Over-the-counter (OTC) derivatives* are generally negotiated privately. The information concerning them is consequently only available to the contracting parties, which can make it difficult to identify the nature and level of risks involved. This regulation aims to increase the transparency, efficiency and safety of OTC derivatives markets.

ACT

Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories.

SUMMARY

Over-the-counter (OTC) derivatives* are generally negotiated privately. The information concerning them is consequently only available to the contracting parties, which can make it difficult to identify the nature and level of risks involved. This regulation aims to increase the transparency, efficiency and safety of OTC derivatives markets.

WHAT DOES THE REGULATION DO?

The regulation (known as ‘EMIR’ - European market infrastructure regulation), lays down rules regarding OTC derivative contracts, central counterparties and trade repositories, in line with the G20 commitments made in Pittsburgh in September 2009.

KEY POINTS

To increase transparencyin the OTC market, the regulation provides that all information on all European derivative contracts must be reported to trade repositories and made accessible to supervisory authorities, including the European Securities and Markets Authority (ESMA).

To reduce counterparty credit risk* the regulation sets out strict organisational, business conduct and prudential obligations for central counterparties (CCPs) and standard derivative contracts must be cleared through CCPs.

To reduce operational risk*, the regulation requires that electronic means must be used for the timely confirmation of the terms of OTC derivatives contracts.

The clearing* and reporting obligations apply to:

financial firms, e.g. banks and insurance firms,

non-financial firms, e.g. energy companies and airlines, which have large positions in OTC derivatives.

ESMA is responsible for identifying contracts that are subject to the clearing obligation, that is, those that are standardised and must go through CCPs. ESMA also supervises trade repositories* and drafts binding technical standards for the application of the regulation.

The European Commission has adopted a number of measures, including technical standards to implement and reinforce the provisions of the regulation. The technical standards, developed by ESMA, cover a range of topics, e.g. capital requirements of CCPs and the minimum data to be reported to trade repositories. The Commission has also adopted ‘equivalence’ decisions for the regulatory regimes for CCPs in certain non-EU countries.

On 3 February 2015, the European Commission published a report recommending that pension funds be granted a 2-year exemption from central clearing requirements for their OTC derivative transactions. It concluded that CCPs need this time to find solutions for pension funds.

WHEN DOES THE REGULATION APPLY?

From 16 August 2012.

KEY TERMS

* A derivative is a financial contract linked to the future value or status of the underlying entity to which it refers. This entity can be, for example, an asset, index or interest rate.

* An OTC derivative is a derivative not traded on an exchange but instead privately negotiated between two counterparties, for example, a bank and a manufacturer.

* Counterparty credit risk is a risk that a counterparty, i.e. the other party in a financial transaction, will default on payment.

* A CCP is an entity that comes between the two counterparties to a transaction, becoming the buyer to every seller and the seller to every buyer. A CCP’s main purpose is to manage the risk that could arise if one counterparty is not able to make the required payments when they are due, that is, defaults on the deal.

* Operational risk means a risk of loss resulting from inadequate or failed internal processes or external events, e.g. fraud, human error, terrorism.

* Clearing refers to all activities from the time a commitment is made for a transaction until it is settled.

* A trade repository is a central data centre where details of derivatives transactions are reported. Trade repositories are commercial firms. There are global trade repositories for credit, interest rate and equity* OTC derivatives.

* An equity derivative is a particular class of derivative such as options or futures.

For further information, see the Derivatives/EMIR pages on the European Commission’s website.

REFERENCES

Act

Entry into force

Deadline for transposition

Official Journal

Regulation (EU) No. 648/2012

16.8.2012

-

OJ L 201, 27.7.2012, pp. 1-59

Amending / Supplementing act(s)

Entry into force

Deadline for transposition

Official Journal

Regulation (EU) No 153/2013

15.3.2013

-

OJ L 52, 23.2.2013, pp. 41-74

Regulation (EU) No 575/2013

28.6.2013.Application: from 1.1.2014, with the exception of certain provisions.

-

OJ L 176, 27.6.2013, pp. 1-337

Regulation (EU) No 1002/2013

8.11.2013

-

OJ L 279, 19.10.2013, pp. 2-3

Directive 2014/59/EU

2.7.2014

31.12.2014

OJ L 173, 12.6.2014, pp. 190-348

Regulation (EU) No 591/2014

5.6.2014

-

OJ L 165, 4.6.2014, pp. 31-32

Regulation (EU) No 600/2014

2.7.2014

-

OJ L 173, 12.6.2014, pp. 84-148

Regulation (EU) No 1317/2014

15.12.2014

-

OJ L 355, 12.12.2014, pp. 6-7

Directive (EU) 2015/849

25.6.2015

26.6.2017

OJ L 141, 5.6.2015, pp. 73-117

Regulation (EU) 2015/880

12.6.2015

-

OJ L 143, 9.6.2015, pp. 7-8

RELATED ACTS

Report from the Commission to the European Parliament and the Council under Article 85(2) of Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, assessing the progress and effort made by CCPs in developing technical solutions for the transfer by pension scheme arrangements of non cash collateral as variation margins, as well as the need for any measures to facilitate such solution (COM(2015) 39 final, 3.2.2015).

Last updated: 26.06.2015

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