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16 May 2017

  |  CBI Brussels

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Review of EU derivatives rules

On 4 May, the European Commission proposed a review of EU derivatives rules that could reduce costs and administrative burden of clearing on non-financial companies. At the same time, the EU could be edging towards moving the clearing of Euro-denominated contracts to the Eurozone.

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Although business in general makes use of derivatives to hedge financial risks, certain types played a role in the financial crisis. In 2009 the G20 therefore agreed that OTC derivatives should be cleared centrally by Central Clearing Parties (CCPs) as much as possible.

This kicked off a wave of regulation to make derivative markets more stable and transparent, resulting in the European Market Infrastructure Regulation (EMIR).

Five years later, the European Commission is conducting a review of EMIR and their proposals may prove a double-edged sword for British business.

This means that some concerning proposals could be on the horizon. In a Communication published on 4 May, the European Commission suggests it may soon set out more rules for the supervision of third country CCPs post-Brexit.

nce the UK leaves, Europe’s biggest clearing houses will be outside the EU. This is leading some to call for a so-called location policy for Euro-denominated derivative contracts, meaning that these contracts could no longer be cleared through UK-based CCPs.

This would result in market fragmentation, as UK CCPs are an important part of the integrated EU financial system.

The outcome could be additional costs for end-users, because of reduced capital efficiencies and increased collateral requirements.

The EU should therefore prioritise alternatives for the oversight of third country CCPs. After all, it is in the interest of businesses in the EU and the UK to continue to have access to efficient derivatives markets.

On a much more positive note, the Commission simultaneously launched legislative proposals that aim at reducing the administrative burden and central clearing requirements for non-financial companies.

EMIR always recognised that non-financial companies only entered into derivatives contracts to manage and reduce the financial risk they face.

The rules therefore require only a small number of the largest non-financial companies to make use of CCPs, once their activities exceed a certain threshold, which are typically extractive companies trading commodities.

Currently ‘dual-sided’ reporting requirements are imposed on all transactions, meaning both the non-financial counterparty and their bank both need to report to trade repositories.

This reporting requirement would now be dropped under the new proposals, as the bank would report on behalf of both parties. Intra-group transactions would also be exempt.

Next, companies that are covered by the central clearing requirement are only required to make use of CCPs for those assets which exceed the threshold, instead of being in scope for all derivatives contracts.

This means, for example, that currency hedges would become cheaper for these companies.

The CBI will work with members to shape the review of EMIR. For more information contact Matthies.verstegen@cbi.org.uk

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