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It's nearly three years since the EMIR regulation – a key piece of our response to the financial crisis – was put into place. This is among the first of many reviews of our post crisis reforms that we will be carrying out in the coming years.
The Commission's top priority is jobs and growth. To deliver that we need a strong economy, one that is underpinned by financial stability. So we must stay focused on the pursuit of stability post crisis and make sure that the new rules are properly implemented.
But we also have a new drive, led by First Vice President Frans Timmermans, on regulating only where necessary, of being smaller on the small things and bigger on the big things. Of legislating less, of reviewing more.
It's my job to apply this approach in my own area of financial services. So I will be looking at the legislation we have passed to make sure we have struck the right balance between reducing risk and enabling growth. To examine where we have got it right and where we may have had unintended consequences.
So far as EMIR is concerned - have we met our objectives of reducing systemic risk and increasing transparency? Have we achieved this in a proportionate way? Is there scope to reduce costs and burdens for our firms without compromising on our objectives?
This also fits in well with the new Commission’s better regulation initiative; we are committed to strengthening the analyses behind our actions to ensure evidence based policy making that is grounded in the facts.
Let's start by reminding ourselves of why we needed EMIR in the first place. It became clear during and after the 2008 financial crisis that risks had been allowed to build up in the OTC derivatives markets. This then led to repercussions around the markets as a number of counterparties defaulted, highlighting how interconnected institutions were and also revealing that regulators didn't know who was exposed to whom. As a result, theG20 decided that all standardised OTC derivatives contracts should be cleared through central counterparties, that non-cleared derivatives should be subject to margin requirements and that all derivatives, cleared or not, should be reported to trade repositories.
While some of the key pieces of EMIR have not yet been fully implemented – such as mandatory clearing – and some pieces of EMIR are yet to be finalised – such as the margin requirements – I know that preparing for implementation has been a pre-occupation for many of you over the past three years. So there is already a lot of information out there and it is a good time to take stock of that experience and see if there are lessons to be learned.
As I am also discovering, some of the trickiest issues with financial services legislation tend to be left to review clauses so I hope you will provide us with some of the answers today.
What have we achieved so far in EMIR?
EMIR is an ambitious Regulation, introducing new requirements in areas previously unregulated at the EU level, or even domestically.
And it is wide in scope, touching not only the financial sector but all users of derivatives in the wider economy.
It sets out requirements in four key areas. It requires all derivatives transactions to be reported so we know where the risks are in the system and can be better prepared in future if things go wrong; it puts in place requirements for central counterparties, CCPs – to ensure they are all subject to the same high standards across the EU; it requires central clearing of standardised derivatives – which reduces risks between market participants compared with a complex web of bilateral trades. For non-cleared transactions it works to ensure that there are incentives to manage risks and encourage central clearing.
Trade reporting will not receive any prizes for being the most exciting piece of the post crisis regulatory reform, but it is critical if we are to be able to spot risks building in the system, and able to respond effectively when something goes wrong. Transparency was woefully inadequate during the last crisis and we must ensure this does not happen again. Trade reporting has been underway since February last year, and ESMA and EU regulators have now received around 10 billion reports to six authorised trade repositories at a daily rate of around 60 million.
With any project of this scale, teething problems are inevitable, although I'm impressed it has gone as smoothly as it has. We need to check whether the data we are receiving is enabling us to monitor markets effectively. Having too much or the wrong information can sometimes be as bad as having none. I'm pleased that we have a panel moderated by Jochem Kimman of the Netherlands Authority for the Financial Markets which will discuss this later. It will also be important for us to understand how this fits with the other reports that will be required under the securities financing regulation and MiFID II and that we avoid duplication.
All 17 EU CCPs are now authorised or in the process of obtaining authorisation. ESMA recently recognised 10 non-EU CCPs across Japan, Hong Kong, Singapore and Australia. There is still work to do with the 31 non-EU CCPs awaiting recognition but we are well aware of the importance of this and are focused on getting there as quickly as is possible.
What is still to come?
Clearing obligations, and margin requirements for trades not centrally cleared – which were at the heart of the G20 Commitments – are still not fully in place. The OTC derivative market has reached$630 trillion and while good progress has been made with nearly half of this market centrally cleared, more needs to be done.
So I am pleased to be able to announce today that we have now finalised our discussions with ESMA and are starting the process of getting the first clearing obligations adopted by the Commission. It has taken us some time to refine the rules in cooperation with ESMA, but as this first set of requirements will set the blueprint for those that follow, it has been crucial to get this right.
This means the first clearing rules for certain Interest Rate products might be in place as soon asApril of next year, although we have provided for a longer phase-in for different types of counterparties for whom implementation is less straightforward, including a three year delay fornon-financial end-users. Non-financial firms make up a significant part of the OTC derivatives markets but EMIR recognises that this does not necessarily make them systemic. We have a panel dedicated to the subject of non-financials, under the moderation of the UK FCA’s Tom Springbett, this morning.
I can also confirm that we will soon put in place the necessary extension of the transitional relief for EU pension funds from central clearing. This will provide a further two years to look at possible solutions to the challenges that pension funds face when clearing. But whether that will be sufficient is a topic we would invite comment on as part of this review.
We look forward to hearing from representatives of both the clearing member and client community on our clearing and risk mitigation panel, in the hands of our moderator Jennifer Robertson, acting head of the Market Infrastructure unit here at the Commission.
With respect to margin for non-cleared trades: we know the ESAs are set to deliver draft requirements to us within the next few months. While this has taken longer than expected, we have achieved an unprecedented degree of consistency in standards globally. This should smooth the operation of global markets and reduce the risks of regulatory arbitrage. We expect these to track the internationally agreed timetable, beginning late next year, but again with a staggered phase-in for smaller counterparties.
What do we expect from today?
So a lot done, but a lot to do. Today is a good opportunity for a stock-take of where we are, what have been the biggest challenges so far and what will be the biggest challenges in the future.
We want to hear about your experiences with EMIR to date. What has worked well? What hasn’t? Which challenges remain? What can we do better? I am sure there will be no shortage of suggestions.
Will this review result in an ‘EMIR II’?
To be honest, this is by no means yet certain. We are not planning a change to the fundamental objectives of the Regulation. EMIR is a key component of our post-crisis reform agenda.
But it does make sense to step back and ask ourselves whether we managed to get everything exactly right all of the time, to see whether there have been unintended consequences. If the evidence does show that the rules are not proportionate to the risks posed by different types of institution, or if there are ways to improve the regulation so it better meets the objective of financial stability, then we should have the confidence to adapt the existing framework.
So I would urge you all to respond to the public consultation which will close on August 13th. And, as always, please put forward solutions as well as problems.
And please speak freely today – we are here to listen. This is a fantastic opportunity to share views between experts from all corners of the industry, regulatory and policy making community.
Following today's discussion, and the responses to the consultation, we will report back later in the year on our findings and the next steps. For those areas, such as clearing, that are yet to come into force, we will give them time to bed down, and look at how they are working in due course.
