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Brussels must do more to clarify EMIR regulation, says ISDA

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GLOBAL - European supervisory authorities must do more to clarify the scope of the EMIR regulation and the timing for its implementation, the International Swaps and Derivatives Association (ISDA) has argued.

In a letter sent to the European Commission, the European Securities and Markets Authority and the European Banking Association, the ISDA said Article 11 of EMIR - which sets out the risk-mitigation techniques counterparties are required to put in place for OTC derivative contracts not cleared by a CCP - was particularly vague.

"The various provisions of Article 11 are not consistent in the way they refer to the contracts which are covered," it said.

It said Article 11 (1) referred to "OTC derivatives trades not cleared by a CCP", Article 11 (2) to "outstanding contracts" and Article 11 (3) to "OTC derivative contracts", while Article 11 (4) did not define its scope.

It called on European authorities to confirm that these differences in terminology did not reflect differences in scope of application, and that all the obligations under Article 11 would be limited to OTC derivative contracts not cleared by a CCP.

It also asks the Commission and the ESAs to confirm that none of the risk mitigation obligations under Article 11 will apply until all relevant technical standards have been adopted.

The ISDA argues in its letter that if such obligations were to be applied as the technical standards come into force, companies entering into derivatives trades could be forced to exchange collateral without knowing the level or type of collateral required to comply with Article 11(3).

In March, ESMA - together with EBA and the European Insurance and Occupational Pensions Authority - published a consultation paper that announced they were considering a requirement to "exchange, post or collect" initial margins for OTC derivative trades.

Those measures aim to limit any residual counterparty credit risk in bi-lateral derivatives trades, according to the three authorities.

However, while posting initial margins on top of variation margins is already established within the EMIR for centrally cleared trades, the possibility of such requirements for OTC contracts has raised the hackles of some pension funds participants, notwithstanding the temporary exemption granted by the European Parliament and the European Council in February.

The National Association of Pension Funds pointed out that UK pension funds were prohibited by law from long-term borrowing, and argued that the use of derivatives - except for risk mitigation or facilitating portfolio management - did not represent a source of credit risk.

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