regulatory framework for over-the-counter (OTC) derivatives
takes shape, indirect clearing is firming up as a key
and European-centric debate.
Securities and Market Authority (ESMA) last week released
on draft technical standards under the European Market
Infrastructure Regulation (EMIR).
The paper is in
line with the ESMAs prior steps towards implementing
EMIR, including its
discussion paper. But it means there are still many unanswered questions
as to how clearing will work, especially when non-clearinghouse
members are involved.
One of the
key areas which I think will be incredibly difficult from a
legal perspective is indirect clearing, said Harry Eddis,
a Linklaters partner in London.
EMIR and the
technical standards require portability and collateral
protection be provided to underlying counterparties. But there
are no rules requiring segregation of client money, as there is
in the US.
not provide the same statutory protection to collateral as US
regulations do and so EU-based CCPs are having to develop their
own collateral protection mechanisms, said Eddis, which
means this could lead to a multitude of different
EMIR was a
bit of a missed opportunity in that regard, he
statutory protections puts clearing members in a difficult
situation. They must provide collateral for indirect members,
sometimes without a direct contractual relationship.
raised the issue in its
February 16 discussion paper, suggesting the Authority set out
criteria for indirect clearing arrangements.
Trans-Atlantic holding pattern
consultation paper coincides with the US Commodity Futures
Trading Commissions (CFTC) long-awaited provision
of cross-border swaps
release last week gives little further guidance on the
international reach of Emir. However Richard Heffner,
a counsel with Dechert in London said European financial
services regulations have tended historically to be
less extra-territorial than US regulations.
With 27 member
states, the EUs complicated rule-writing process means it
lags behind the US in OTC derivative reforms. It seems the
interaction of the two regimes has been left in a holding
pattern, including through the CFTCs grandfathering
allowances, until the EU framework becomes clearer.
positive signs though. Compared to its draft of 18 months ago,
the final text of EMIR gives greater recognition of swap
clearing activity overseas. It certainly seems the US and
EU regulators are trying to mesh their regulations a much as
possible, Eddis said.
On July 12 ESMA
will hold a public
hearing on the technical standards. The comment period closes on