2015 is expected to be a pivotal year for the OTC derivatives market regulation reaching the complete implementation of Basel III, Dodd-Frank Act and EMIR, the latter along with the subsequent reforms of the MiFID.
The OTC derivatives trading through CCPs and the clearing obligation will be completely launched over the summer, thus buy-side firms are in the run of preparing themselves to meet the regulatory requirements. Although there have been tensions surrounding the systemic importance of CCPs and the correlative concentration of risk, the use of these market infrastructures has being gaining acceptance. Among the arguable advantages of the CCPs structure there are the capital efficiency, the better risk management, increase transparency and the reduction of operating costs.
Regulators are very keen to extend 'clearing' across all products, either through the mandatory obligation or by means of incentivising market participants (for uncleared derivatives).
There are still numerous aspects to be reviewed, among others we could anticipate: the further assessment of risk models, margin requirements on uncleared derivatives contracts and cross-border issues.
One illustrative example of cross-border difficulties is the issue that concerns non-EU CCPs wishing to provide services in Europe. Under EMIR non-EU CCPs are required to be recognised in the EU, otherwise additional capital charges would be imposed to them. In this regard, the provisional decision of European regulators is to postpone the imposition of higher capital charges on unrecognised CCPs by six months to June 2015.
The reason for this sort of cross-border issues is that the European Commission has to officially recognise as equivalent the CCPs overseen by non-EU authorities, and such decision is yet to be made. The 'equivalence decision' means that the Commission is satisfied that: (Art.13 EMIR)
a) the rules on clearing, reporting, the clearing thresholds and risk mitigation in that third country are equivalent to those in EMIR
b) the third country has equivalent provisions on professional secrecy; and
c) the rules are effectively applied and enforced so as to ensure effective supervision and enforcement.
In terms of transparency the implementation of MiFID II brings new rules on pre and post-trade transparency, besides the European approach to swap execution. The final consultation on MiFID II was published in December 2014 (available in the previous post in this blog)
