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September 16, 2014

Comply! But how?

Although EMIR regulation (EU) 648/2012 entered into force as from 12th August 2012, there are still many open points and issues which have to be clarified by industry participants and the authorities. ESMA is struggling to provide further answers through the irregular publication of Question and Answers (Q&A) in order to successively shed some light over the ambiguous regulatory provisions. In order to achieve regulatory compliance, such ex-post clarifications force many market participants to constantly adapt their regulatory measures if not even to start from zero, again.

As an example one just needs to consider the reporting obligation of collateral information, which is mandatory since 12th August 2014. Regarding the definition of a full collateralization most market participants are following within their EMIR projects their collateral agreements with their counterparties. Contrary to that ESMA defines in their 9th Q&A documentation which was published on 23rd June 2014 that a trade is fully collateralized when both counterparties exchange initial margin as well as variation margin. As a result, the process of report generation for the regulatory reporting under EMIR needs to be modified, yet again. In addition, market participants have to face several other issues. Uncertainty exists also regarding the definition of the market value of derivative contracts which has to be reported, e.g. for FX Swaps. One part of the reporting entities is using the settlement amounts on the relevant fixing dates while other counterparties are using the notional amounts including the change of value. Trying to address this issue directly at ESMA seems not to provide more benefit than to just putting words to paper. An answer is hard to expect. In return the market is left alone while important circumstances are post-fixed. Whether or not such “post-regulations” are reasonable can be doubted. Especially as the market is staggered with such provisions that require market values to be reported as absolute values – without any further explanation.

The question may be raised what informational value can be derived from reporting a value of derivative contracts without any algebraic sign. Clearly, a risk assessment within the derivatives market is not feasible that way. Under the current circumstances one can easily get the impression that at the point in time when the reporting under EMIR became an obligation it was more about bossing the industry than truly implementing the G20 Pittsburgh decisions which were aiming on an increased transparency and a reduced risk within the derivatives market. While the industry is striving to achieve full regulatory compliance, the authorities do not seem to put enough effort into supporting the market participants on their way to meet the requirements. Instead of providing answers and support, the industry finds a detailed catalogue of penalties which has been finalized already, e.g. in Germany § 39 WpHG (Wertpapierhandelsgesetz). As a matter of fact, financial institutions have no alternative than to base their actions on assumptions, which in return will lead to high efforts put into further modifications.

Taking into consideration that the given examples are a few out of many it could be questioned whether the regulation was ready for the market when it entered into force. Maybe it would have been smart to follow the hints coming from the industry side and to complete the regulatory provisions first instead of insisting on a prematurely fixed start date. It is arguable what kind of value added reports possess which are generated under such circumstances. Can authorities call their own analyses which are based on such data really meaningful? Is it really possible to recognize and reduce risk that way? That the political will often ignores that what is technically doable and regulatory useful shows, as an example, the denial of ESMAs suggested shifting of the reporting start date for ETD trades by the EC.


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