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IPE special report May 2018

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ESMA publishes technical standards on EMIR regulation

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  • ESMA publishes technical standards on EMIR regulation

EUROPE - The European Securities and Markets Authority (ESMA) has sent its draft technical standards on the EMIR regulation to the European Commission today in which the authority maintained the 99.5% minimum confidence interval for OTC derivatives, but adopted a more flexible approach after the measures raised concerns among market participants, including pension funds.

In its technical standards on the Regulation on OTC derivatives, central counterparties and trade repositories, ESMA confirmed that the minimum confidence level for centrally cleared derivatives trades would be set at 99.5%, as originally defined in its previous consultation paper.

However, the authority conceded that a lower percentage could be used for products similar to exchange-traded ones.

The International Organisation of Securities Commissions and the Basel Committee on Banking Supervision originally set this percentage to calculate initial margin using a value-at-risk model at a confidence level of 99%.

However, this was for non-centrally cleared OTC trades.

The minimum confidence level has proved to be highly controversial since Brussels mentioned the potential implementation of a similar confidence level for centrally cleared transactions in June this year in its consultation process on technical standards for EMIR.

Pension funds have argued since then that such a high level would incentivise central clearing parties (CCPs) to increase the volume of collateral they might need from clients.

Additionally, the technical standards published by ESMA today have revealed that the calculation of the look-back period has been "substantially" redesigned, moving towards a period of at least one year including stressed market conditions, and pro-cyclicality being addressed in a different and more flexible manner.

The two-day minimum liquidation period for margin calculation has been maintained, while more "flexibility" has been introduced for the models applicable to portfolio margining, according to ESMA.

"The skin in the game, as a percentage of the minimum capital, has been reduced to 25% from the initial 50%," it said.

In its technical standards, ESMA also set out the requirements for reporting methods, in which the authority clarified that reporting of collateral could be done on a portfolio basis, and that reporting of mark-to-market values would only be applicable to those counterparties under the obligation to calculate those on a daily basis.

As for the risk mitigation techniques for OTC derivatives that are not centrally cleared, ESMA introduced phase-in periods for all requirements and adjusted the frequency of reconciliation.

The authority also stressed that the requirements for clearing members under an indirect clearing arrangement had been "substantially" modified, while still maintaining equivalent protection to indirect clients.

Steven Maijoor, ESMA chair, said: "The publication of ESMA's standards on EMIR sees the EU taking its final steps towards meeting the G20 commitment on bringing OTC derivatives trading under supervision, and provides clarity to the market on the shape of the new regime.

"The new regulatory framework reduces the risks arising from OTC derivatives trading by improving transparency in the sector and ensuring resilient central counterparties."

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