Firms not ready for Friday’s EMIR deadline on OTC trading – PwC
The first compliance deadline of the European Markets and Infrastructure Regulation (EMIR) comes into force this Friday, catching many financial and non-financial firms unaware, according to consultancy PwC.
EMIR fulfils several of the European Union’s (EU) G20 commitments to reform the global $630trn over-the-counter (OTC) derivative markets.
The reforms are designed to reduce systemic risk and bring more transparency to both OTC and listed derivatives markets. EMIR introduces derivative rules which will apply initially to financial and non-financial counterparties located in the EU and later to entities trading outside the EU under certain circumstances.
EMIR legislation came into force on 16 August 2012. Technical standards designed to implement the requirements were completed on 23 February and the first obligations for firms come into force on Friday (March 15).
The obligations require financial and certain non-financial counterparties to provide a daily valuation and timely confirmation of trades from 15 March, with other operational requirements phased-in during the remainder of 2013.
EU legislators have set out this unusually short implementation period in a push to meet their overdue G20 commitment to introduce derivative reforms by the end of 2012. But, given the short timeframe and the complexity of the compliance requirements, many firms are likely to be unable to meet the deadline, PwC said.
Crispian Lord, regulation partner at PwC, noted that “regulatory fatigue” is also a factor as many firms are being hit by an unprecedented amount of new post-reform regulation to implement.
“Regulators may well take a pragmatic view of firms which are not compliant by the deadline. However, they will require firms to provide evidence they are acting in good faith and doing everything they can to comply as soon as practically possible.”
More detailed EMIR technical standards and secondary legislation will be produced during 2013. This will address EMIR’s extra-territorial application, identifying clearing mandatory contracts, rules on capital, margin and collateral for non-centrally cleared trades, and third country equivalence.
EMIR introduces three categories of requirements:
1. Regulatory reporting – report all derivative transactions (listed and OTC) to EMIR trade repositories (TRs).
2. Clearing – centrally clear all OTC derivatives deemed clearing eligible with EMIR authorised central counterparties.
3. Risk management – fulfil margin and collateral requirements and clearing-like operational risk management processes.
While EMIR is expected to reduce counterparty credit risk and improve derivative trading operational efficiency, market participants fear that the new and higher collateral requirements will contribute to a global liquidity shortage, increase the cost of trading and reduce hedging, and concentrate systemic risk in central counterparties, PwC said.