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AMF priorities in the EMIR review

While in November 2016 the European Commission undertook a review of EMIR on derivative products traded over-the-counter, the AMF is publishing two position papers on its priorities under the EMIR review and on the conditions under which post-market infrastructures based outside the European Union can benefit from the equivalence regime.

On 23 November 2016 the European Commission published a report on the review of EMIR on derivatives traded over-the-counter, adopted in 2012. This falls within the extension of the consultation initiated by the European Commission in May 2015 on EMIR revision, to which the AMF had responded. A draft amendment of the Regulation is expected to be published soon.

For the AMF, implementation of EMIR has revealed the need for greater proportionality and consistency. Finalisation by the other international financial centres of their regulations on derivatives has also highlighted the possibility for market players of carrying out regulatory arbitrages, strengthening this need for proportionality. Furthermore, these considerations need to be put into perspective with current market trends that are increasingly placing market infrastructures in competition with each other. These matters take on particular significance in light of Brexit by reason of the challenges to market infrastructures currently located in the United Kingdom. All these considerations mean it is vital to review the regime laid down by EMIR for activities carried out from or with third countries.

In this context, the AMF wishes to stress the priorities that seem to it essential when reviewing EMIR:

The AMF supports the objective of strengthening the proportionality of the obligations specified by the text

The obligation to report derivatives to trade repositories needs to be rationalised

The obligation to report derivatives to trade repositories has generated redundancies, operational and legal complexities and in certain respects even data inflation: while the AMF remains attached to the principle of a reporting by both parties to the contract, it defends the need for proportionality, which could be characterised by the following measures: 

  • removal in EMIR of the obligation to report transactions on listed derivatives, except for positions on commodity derivatives, for which access to information on the end beneficiary presents undeniable interests for exercise of its supervisory tasks by the AMF;
  • transition from the current system of double-sided reporting to a simplified system based on the reporting by just one of the two counterparties (single-sided reporting), when a contract is concluded between a financial counterparty and a non-financial counterparty that does not exceed the clearing thresholds or a UCITS or AIF manager who intervenes marginally in derivatives;
  • removal of the obligation to report intragroup transactions between non-financial counterparties whose positions do not exceed the clearing thresholds.

Small financial counterparties need to be exempted from the clearing obligation

The AMF supports the principle of exemption from the clearing obligation for transactions concluded by financial counterparties that only occasionally use derivatives, in view of the low risk represented by these entities and the burden represented by mandatory clearing.

The AMF takes the view that the EMIR review needs to be the occasion to rethink Europe’s relationships with third countries

For the AMF, the EMIR review need not be purely technical.

EMIR, like other European texts (MiFID/MiFIR in particular), specifies an equivalence principle that enables an institution located in a state outside the European Union (third country) to offer its services in the European Union, by complying with the legislation applicable on its territory and being exclusively supervised by its local supervisor. This mechanism presents limits also revealed on the occasion of practical implementation of the equivalence principle for central counterparties (CCP) of third countries. The AMF takes the view that this mechanism needs to be revised and it is making recommendations to this end.

These recommendations are aimed at rationalising the process for examining the equivalence of regulations, setting out the criteria to be taken into account by the European Commission in the initial evaluation and strengthening the equivalence monitoring mechanism over time. ESMA role should also be reinforced in this mechanism. Reciprocity needs in all cases to be an indispensable condition of equivalence. The importance of the activity in the European Union of infrastructures should be taken into account when assessing equivalence, particularly to distinguish:

  • critical infrastructures offering their services in products denominated in euros whose weight is such that they pose a system risk in the European Union and to which the equivalence regime should not apply since these infrastructures absolutely should be located in Europe for their activity in euro; otherwise, the largest positions of clearing members and European clients would be cleared in CCP that would not be, in the future, supervised in the European Union. These extraneous factors can be sources of day-to-day concerns and exacerbated in the event of a crisis if it was necessary to access to ECB liquidity;
  • infrastructures of significant size, which should be subject to strict equivalence of regulations and supervision by ESMA; 
  • smaller infrastructures for which the current equivalence regime should prevail.

The AMF will pay particular attention to client clearing

The prospect of implementation of the central clearing obligation has given rise to areas of friction between regulations: in particular, the rules specified by the UCITS directive were designed more for OTC relationships and do not necessarily take account of the specifics of central clearing. Thus, for example, limitation of the counterparty risk of UCITS concluding over-the-counter derivative contracts to 5% or 10% for reasons of risk diversification needs to be rethought given the clearing obligation, taking account, as the case may be, of the level of segregation retained by clients.

Similarly, the current constraints of UCITS in terms of reusing the collateral received in the form of securities need to be reviewed in light of the central clearing obligation.

The categorisation of securitisation vehicles needs to be improved: while securitisation vehicles are now exempt from central clearing on account of their categorisation as non-financial counterparty, only STS vehicles genuinely merit such an exemption.

Finally, the prospect of the central clearing obligation for derivatives traded over-the-counter, completely unprecedented for clients, has also given rise to difficulties of interpretation concerning the precise role and the responsibilities of the clearing member with respect to clients. The AMF takes the view that clearing members’ obligations need to be clarified and strengthened at European level.