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| Berlaymont: The European Commission's headquarters in Brussels |
Revisions to EMIR adopted by the European Commission (EC) in May do not go far enough to address deficiencies in reporting rules for over-the-counter derivatives, according to industry officials and end-users.
Speaking at the International Swaps and Derivatives Association’s (ISDA) annual Europe conference in London on September 28, Patrick Pearson, head of the EC’s financial markets infrastructure unit and one of the architects of EMIR, faced calls for the regulation to switch to a single-sided reporting regime, whereby only one counterparty is required to report each trade, reducing the potential for duplication and errors.
“We really applaud the work of the European Commission and the direction in which it has gone, but why not go all the way to what has been referred to as entity-level reporting or single-sided reporting, where there is one common data stream?” asked Tom Clark, executive counsel for government affairs and policy at GE Capital.
The requirement for dual-sided reporting under EMIR is one of the main differences between European and US rules on derivatives, as the US Dodd-Frank Act allows single-sided reporting.
The EMIR amendments unveiled in May allow that transactions between a financial counterparty and a non-financial counterparty not subject to the clearing obligation can now be reported by only the financial counterparty, while intragroup transactions between companies belonging to the same group – where at least one side is a non-financial counterparty – need not be reported.
Stop short
However, the review stops short of fully aligning with the US position on single-sided reporting.
Clark is not alone in suggesting the concessions might not be sufficient. In a conference poll, only 29% of delegates said they felt the European Commission had gone far enough on its proposed reporting changes.
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| Scott O’Malia, ISDA |
In his opening remarks, ISDA chief executive Scott O’Malia welcomed the EMIR review, but called for further amendments to the regulation. “We would strongly urge regulators to go further with their changes to the reporting rules by introducing an entity-based approach, where sole responsibility for reporting is assigned to a single counterparty in all cases,” he said.
“This would bring the EU in line with other major jurisdictions, reduce complexity for end-users and improve data quality and consistency.”
When challenged on the reporting changes, the EC’s Pearson did not rule out a move to single-sided reporting, pending further dialogue with the European Securities and Markets Authority (ESMA), which is the body responsible for overseeing the technical implementation of EMIR and any further amendments to the regulation across the EU.
“The dialogue we have with ESMA is intense, but we have to understand where we come from and what the needs and requirements are. That’s why single-sided reporting is a goal – it’s certainly on everybody’s radar screen – but Rome wasn’t built in a day,” said Pearson.
Beyond amendments to reporting rules, the EMIR refit also extends the exemption from central clearing for pension funds for a further three years, in recognition of the difficulty of requiring pension funds to post cash collateral without adversely impacting policyholders.
'Sharp edges'
It also eases the central clearing obligation for non-financial counterparties by requiring that they clear contracts only in those asset classes that breach the designated clearing threshold, rather than having to clear their whole portfolio.
“We knew when we adopted [EMIR] that we might have got some things wrong, and the refit proposal tries to amend and revise the sharp edges where we think we could do better,” said Pearson.
“My perspective is that [corporates] should only have to centrally clear in the asset classes they are most active in and where they breach clearing thresholds. We need to be much more proportionate.”
Corporates trading only a small volume of derivatives that do not breach clearing thresholds will also benefit from the reporting changes as the financial counterparties will now be responsible for reporting on their behalf.
GE’s Clark welcomed this recognition of the burden that reporting might place on small corporations.
“There is a great deal of support for reducing the reporting burden for corporates, particularly the idea that this is really something that should be done by the financial counterparty rather than real-economy companies that are not set up to be doing this kind of reporting as part of their bread-and-butter business,” said Clark.
“Corporates are making aircraft engines, they’re making equipment and they’re employing people, so they really shouldn’t be diverting a lot of resources for an activity that is the bread and butter of their financial counterparties.”