White smoke from Brussels on EMIR refit?

EMIR (the European Market Infrastructure Regulation) was adopted in 2012 as a response to the financial crisis to better manage and monitor the derivatives and related risks. However, in recent years, the EU Commission carried out an important assessment of EMIR to see whether it would be possible to amend it and to potentially simplify it, while maintaining enough degree of security around financial derivatives. The objective was to amend some provisions to eliminate disproportionate costs and burdens on certain derivative counterparties without compromising global aim of this regulation.

On 4th May 2017, the EU Commission proposed a regulation (the so-called “EMIR refit” – Regulatory Fitness and Performance program) to address these issues (e.g. disproportionate compliance costs, transparency, insufficient access to clearing for some counterparties, …).

On last February the 5th, the political agreement was eventually reached by the EU parliament and EU State members on an EMIR reform requested by treasurers, among other stakeholders. They propose to exempt small counterparties from clearing obligation.

We are still waiting for the outcome. Nevertheless, we have a fair idea of what should be the result. Some of the proposed changes will impact firms and often positively impact the reporting. As examples, the end of the front-loading requirement, the useful introduction of a threshold for smaller companies, clearing by NFC’s of the sole asset class(es) for which a breach of threshold has been identified (no tainting rule), end of the back-loading requirement for transactions that were outstanding as of the reporting obligation start, exemption to report intragroup transactions where one of the counterparties is an NFC, FC transacting with a small NFC will report on behalf of both parties for OTC derivatives transactions – FC’s will be mandated and legally liable to report transactions on behalf of both counterparties.

We should be pleased by the outcome if it is what we have listed above (although our list of amendments is not comprehensive). It is rather good news for all treasurers, in my opinion. But I encourage all companies to remain cautious. The end of intercompany reporting obligation is a good new. However, some treasurers could be tempted to delegate the reporting to their banks. Who know what banks will do? I remain skeptical on banks agreement to accept such a delegation, for free, despite the risks and the costs for them. The risk is that banks will refuse to report on behalf or at a certain cost. There again, smaller NFC’s will be penalized and potentially charged for these services. Without appearing as a seer or a prophet, I’m not, that’s one of my 2019 predictions. The second one (re. derivatives) is the risk that some banks in a first stage and then all banks active on financial instruments, require (bilateral) collateral (even if not imposed by EMIR Refit). It would be a sort of paradox. Furthermore, FX dealing remains a low margin or even no margin business. If banks play the volume, collateral could help. It could also enable treasurers to reduce increasing costs of hedging, providing they have cash to collateralize during the lifetime of the derivative. It is certainly an option to contemplate.