Pursuant to a compromise proposed by the European Commission on 7 February, the European Parliament has withdrawn its objection to two of the delegated acts adopted by the Commission relating to technical standards supplementing Regulation EU No 648/2012 (EMIR) on OTC derivatives, central counterparties and trade depositories.      


ESMA published its Final Report on draft technical standards under EMIR for submission to the European Commission on 27 September 2012.  On 19 December 2012, the Commission adopted (without amendment) five of the six draft regulatory technical standards ESMA had proposed in the form of delegated regulations.  However, the Commission did not adopt the sixth, which related to colleges for central counterparties, and only provided the European Parliament (inter alia) with its reasons for not doing so by letter of 31 January 2013 – some 6 weeks later.

Amongst the adopted delegated regulations were:

  • C(2012)9593: 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 not cleared by a CCP; and
  • C(2012)9623: regulatory technical standards on requirements for central counterparties.

Although the ESMA Regulation gives the European Council and the European Parliament the right to object to a regulatory technical standard within three months from the date of notification of the standard adopted by the Commission, the scrutiny period is limited to one month where, as here, the delegated act adopted by the Commission is the same as the draft regulatory technical standard submitted by ESMA.   As explained in our earlier post, the European Parliament sought and was granted a one month extension – to 19 February 2013 – for further scrutiny, on the basis that the adoption of the delegated regulations shortly before Parliament’s winter recess had made it impossible for Parliament to exercise its scrutiny rights.

The objection

On 4 February 2013, the Economic and Monetary Affairs Committee of the European Parliament (ECON) adopted a motion for a Parliamentary resolution to reject delegated acts C(2012)9593 and C(2012)9623.  It is apparent from that motion that ECON was concerned not only about the Commission’s failure to give proper consideration to the Parliamentary timetable, but also about:

  • the fact that although comments from members of ECON had been transmitted promptly after ESMA’s draft technical standards were published, the Commission had failed to respond until after the adoption of the delegated regulations (which of course were adopted without amendment and accordingly did not apparently take into account the views which the MEPs had expressed);
  • the fact that not all the draft regulatory technical standards provided for in EMIR had been submitted by ESMA by the 30 September 2012 deadline, and notably that the draft regulatory technical standards due under Article 4(4) and Article 11(15) of EMIR remain outstanding, and that Parliament had not been promptly informed of a revised timetable or the reasons for the delay.

The specific concerns the MEPs had raised in respect of delegated acts C(2012)9593 and C(2012)9623 are listed in the ECON motion, and include various instances where the MEPs considered that the technical standards failed to reflect the intention and or the outcomes envisaged by EMIR.  The concerns raised were as follows:

  • Clearing obligations: Recital 25 of Regulation C(2012)9593 envisages that the excess of one of the values set for a class of OTC derivatives should trigger the excess of the clearing threshold for all classes, but this could effectively impose a clearing obligation and margining requirements on other entities within the same group – which would be inconsistent with Article 10(4)(b) of EMIR, and where a non-financial counterparty within the group exceeded the clearing threshold in one class of OTC derivatives, could force a group to clear all other classes of OTC derivatives automatically.
  • Clearing threshold for non-financial counterparties: Article 11 and Recital 22 of C(2012)9593, which refer to the gross notional value of OTC positions for setting the clearing threshold for non-financial counterparties, fail adequately to take into account the systemic relevance of the sum of net positions and exposures per counterparty and per class of OTC derivatives and risk triggering mandatory clearing at a level considerably below systemic relevance – the MEPs felt a threshold referring to the net exposure would better represent risk and be more easily implemented.
  • Marking to market for non-financial counterparties: Article 13 and Recital 28 of C(2012)9593 do not sufficiently reflect  Article 11(2) of EMIR with regard to the obligation for marking-to-market which applies to non-financial counterparties which are subject to the clearing obligation since they fail to clarify that non-financial counterparties that are not subject to the clearing obligation are not required to mark-to-market.
  • Portfolio reconciliation for non-financial counterparties: Article 13(3)(b) of C(2012)9593 sets a threshold at 100 OTC derivative contracts per counterparty above which portfolio reconciliation is required on a quarterly basis for a non-financial counterparty which is not subject to the clearing obligation – the MEPs considered that given the cost of quarterly portfolio reconciliation for non-financial counterparties, a threshold of 300 OTC derivative contracts would be more appropriate for non-financial counterparties not subject to the clearing obligation;
  • Electronic confirmations: Although Article 12 of C(2012)9593 allows for phased implementation of the requirement for electronic confirmation procedures, it fails to appropriately reflect EMIR’s intention that alternative procedures should be considered on a permanent basis for certain counterparties or transactions that are not suitable for electronic confirmation (specifically in respect of OTC derivative contracts entered into by smaller non-financial counterparties who transact on an infrequent basis for whom alternative manual procedures might be sufficient).
  • Collateral backing for bank guarantees: The conditions for collateral backing of commercial bank guarantees in Annex 1 Section 2(1)(h) of C(2012)9623 effectively make the use of bank guarantees virtually impossible for non-financial counterparties, contrary to Article 46(1) of EMIR.
  • Time horizons for the liquidation period: In setting different liquidation periods for margin calculation purposes, Article 26(1) of C(2012)9623
    • effectively discriminates between derivatives traded on a regulated market and OTC derivatives that are subject to both to the clearing and trading obligation and have comparable risk profile, and could adversely impact the risk management of companies in the European Union, with overall negative macroeconomic effects; and
    • specifies a liquidation period for financial instruments other than OTC derivatives which diverges from the equivalent US requirements and exceeds the recommendations set out in the CPSS-IOSCO principles for financial market infrastructure – which could adversely impact on EU-based users of these instruments.

The compromise

The Commission has now effectively brokered a compromise, pursuant to which the clearing obligations for non-financial firms will be phased in over an appropriate period (which might be similar to that proposed in the technical standard for bank guarantees – i.e. 3 years from entry into force of the regulation), to give non-financial firms time to fully adapt to the new landscape.

The Commission has also agreed to provide further clarification of the application of standards for timely confirmation (see electronic confirmations above) referred to in Article 11(1)(a) of EMIR.  The European Parliament has accordingly withdrawn its objection to the delegated acts.

Commissioner Barnier’s statement confirms that since the Council had previously confirmed that it did not object to the proposed standards, delegated regulations C(2012)9593 and C(2012)9623 will now enter into force 20 days after their publication in the Official Journal of the EU, most likely around mid-March 2013.

Going forward

It seems that ECON’s stand on this issue may lead to some improvements in inter-institutional communications going forward, including, as the Commission’s compromise suggests, more regular exchanges between the Commission and ECON:

“The development of technical standards is terra nova for all institutions.  The Commission is sure that the process will be developed and refined over time.  The Commission stands ready to work together with Parliament to ensure an open dialogue and transparency about our planning for forthcoming technical standards and ensure that Parliament has enough time, in the framework of the relevant inter-institutional agreement, to assess them.

In particular, as regards the procedures relating to the preparation of delegated acts and with a view to developing good practices in that matter, the Commission will promote a clear understanding on working relations including for instance meetings and planning, and regular exchanges of views between the Commission and ECON on regulatory standards, taking full account of existing inter-institutional agreements on the timing of sending legislative acts to Parliament.”

However, the timeframe set by the G20 for implementation of regulation to reduce risks related to derivative transactions, reflected within EMIR, and for regulatory reform more generally, is undoubtedly putting pressure on the European institutions.  In February 2012, a group of trade associations had raised concerns about the timetable imposed for the development by ESMA of draft technical standards on the Regulation on short selling and certain aspects of credit default swaps, and the 3 weeks allocated for consultation responses, stressing the need for more detailed analysis of the impact of those requirements on the operation, efficiency, and liquidity of the market.

It seems reasonably clear from this latest episode that aggressively tight timetables are continuing to affect the quality of the outputs from the European legislative process.

It is particularly interesting to consider where this latest compromise leaves those aspects of the delegated acts identified by ECON as being inconsistent with the intention or desired outcomes of EMIR which the compromise does not address, and whether, and how, the European Court might take these issues into consideration in any future legal challenge involving interpretation of those delegated acts.