Capital markets union: deal on updated rules for financial derivative products and clearing

European Union (EU) institutions are simplifying rules applying to non-financial counterparties, small financial counterparties and pension funds using financial derivative products.

The Romanian presidency of the Council and the European Parliament reached today (6 February) a preliminary agreement on improving the existing regulatory framework applying to the over-the-counter (OTC) derivative market. The deal will now be submitted for endorsement by EU ambassadors.

More transparency

In the aftermath of the financial crisis, the EU put in place a solid and effective framework for bringing more transparency and reducing systemic risk in the derivative markets. Today, we agreed targeted adjustments that will preserve all the core elements of the reform, whilst simplifying the rules and making them more proportionate.

Eugen Teodorovici, minister for finance of Romania which currently holds the presidency of the Council

The European Market Infrastructure Regulation (EMIR), adopted in 2012, forms part of the European regulatory response to the financial crisis, and specifically addresses the problems encountered in the functioning of the OTC derivatives market during the 2007-2008 financial crisis.

In May 2017, the Commission proposed a regulation amending and simplifying EMIR to address disproportionate compliance costs, transparency issues and insufficient access to clearing for certain counterparties.

In order to increase the efficiency of the regulatory framework, the text agreed by the co-legislators introduces a new category of “small financial counterparties” which will be exempted from the obligation to clear their transactions through a central counterparty (CCP), while remaining subject to risk mitigation obligations. In the same way, smaller non-financial counterparties will have reduced clearing obligations. The text also extends by another two years (further extendable twice by an additional year) the temporary exemption from the clearing obligation of pension scheme arrangements.

As regards reporting obligations, the regulation will streamline existing rules in order to improve the quality of the data reported and make the supervision more effective: it will remove the obligation to report historic data (“backloading”) as well as intragroup transactions involving non-financial counterparties.

Finally, the regulation aims to create incentives and increase access to clearing by removing existing unnecessary obstacles. In particular, the text introduces an obligation on clearing brokers to provide services on fair, reasonable, non-discriminatory and transparent commercial terms (“FRAND”) by ensuring in particular transparency on fees as well as unbiased and rational contractual arrangements.

Next steps

The text will now be submitted to EU ambassadors for endorsement. It will then undergo a legal linguistic revision. Parliament and Council will be called on to adopt the proposed regulation at first reading.