Central Bank issues guidance note on EMIR Regulatory Return
Following a review of trade repository data (as at 31 August 2015) a number of Non-Financial Counterparties (NFCs) were identified as having significant derivative positions. Trade repository data was reviewed by each derivative class (Commodity, Credit, Currency, Equity and Interest Rate) and from this review, the most significant NFCs were selected (NFCs that have significant derivatives positions but are not classified as NFC+).
The Central Bank requires these NFCs to complete the ERR for the period 1 January 2015 to 31 December 2015. Correspondence to the identified NFCS was issued on Wednesday 30 September 2015. The completed ERR for 2015 is due for submission to the Central Bank by 29 January 2016. A soft copy of the ERR along with guidance on completing the return is available on the Central Bank website.
Response to Department of Finance consultation on EMIR implementation
On 14 March, in cooperation with the Irish Debt Securities Association (IDSA), ISDA responded to the Irish Department of Finance consultation on member state discretions in EMIR. The response highlights concerns about a number of aspects of Irish implementation indicated in the consultation paper. ISDA advise that it is imperative that in implementing EMIR fully and properly, the legislature does not impose obligations that go further than what is required by the Regulation itself, and that are in excess of what is being introduced in other EU jurisdictions. In this regard, ISDA points particularly to the proposals for:
a Statement of Compliance and Skilled Person's report, which will place an unequal burden on an Irish NFC- compared to that of equivalent entities in other Member States;
a power of the Central Bank to give directions, including a direction “to take or refrain from taking or to prohibit actions, including entering into derivatives contracts”, which we consider an extraordinary power for the Central Bank to have in respect of entities that are not regulated financial services providers or their related undertakings, and which we believe would have a serious detrimental effect on the ability of Irish counterparties to confirm they have the capacity and power to enter into legally binding derivatives contracts; and
criminal sanctions for breach of EMIR, which we consider to be disproportionate and out of line with the sanctions regime in other Member States.
IDSA notes the position taken by the Department that all FX forward transactions with a settlement date beyond the spot date, even if entered into for commercial hedging purposes, are to be considered as within the definition of a derivative under EMIR. In its letter of 14 February 2014 ESMA publicly signalled that, if it was legally possible, NCAs should not apply EMIR to certain FX forwards and certain commodity forwards. IDSA requests that the Department of Finance and the Central Bank should provide public assurance that they will follow ESMA’s approach and not apply EMIR to such contracts.
ISDA Accounting Committee White Paper: Consideration of Accounting Analysis for CCP Recovery and Continuity Tools
Central counterparties (CCPs) are required to develop recovery plans and ensure they can maintain continuity of critical services in times of market stress. One threat to CCP viability is the default of one or more clearing member(s) (CM(s)). In January 2015, ISDA proposed a recovery framework to address this specific threat. Among other things, ISDA contemplated a situation where a CCP may be able to auction most of the hedged portfolio of the defaulting CM(s), but the remainder of the portfolio attracts no bids and therefore creates open exposure for the CCP. To enable the CCP to extinguish this exposure, ISDA proposed that the CCP adopts rules permitting partial tear-up. Partial tear-up would permit a CCP to re-establish a matched book with respect to the remainder. ISDA has come up with a non-exhaustive list of partial tear-up structures. All structures assume that the CCP terminates identified positions at the last available price for that contract (i.e., at "fair-value"), and that partial tear-up is not a means of loss allocation but solely aimed at enabling the CCP to re-establish a matched book. The white paper sets out a number of factors to be considered by the CCP in assessing whether its partial tear-up regime could be construed to contravene the list of relevant accounting assumptions.
The paper aims to identify the potential accounting consequences of different CCP partial tear-up structures under US GAAP and IFRS. A preliminary examination indicates it is possible for a CCP to design and implement a partial tear-up regime that does not frustrate the accounting considerations outlined in section A of this paper.
Minister for Finance introduces Investor Compensation Act 1998 (Return of Investor Funds or Other Client Property) Regulations 2015
On 23 September the Minister for Finance introduced the Investor Compensation Act 1998 (Return of Investor Funds or Other Client Property) Regulations 2015 which set out rules which will provide greater legal clarity following investment firm failures. The purpose of these rules is to improve the outcomes for investors in the recovery of their assets following such a failure.
EU & INTERNATIONAL
FSB releases progress report on FX benchmark reforms
On 1 October the Financial Stability Board (FSB) published a progress report on implementation of its September 2014 recommendations for reforms to FX benchmarks. One of the principal aims of the recommendations of the FX benchmarks report was to reduce the incentive and opportunity for improper trading behaviour by market participants around the benchmark fixes.
Overall there has been good progress in implementing many of the recommendations; however, in some cases progress has been mixed. The report re-emphasises that the FSB recommendations are intended to apply to all FX benchmarks, not just the WM/Reuters (WMR) 4pm London fix. Key points from the report:
Useful steps have been taken to reform the methodology of the widely used benchmark WM/Reuters (WMR) 4pm London fix, though there is scope for further progress on reforms in this area. Several central banks have also undertaken reviews of their processes for producing FX reference rates.
Recommendations to support more transparency in customer pricing for fixing transactions have seen good implementation among the largest market participants and for the most used benchmarks, but elsewhere there is scope for further improvement. Similarly, steps to separate dealers’ fixings business from other activities are being taken by the larger participants and in the most active markets, but again there is room for further implementation in other areas of the FX market. For the execution of benchmark transactions, industry-led initiatives to promote greater use of independent netting and execution facilities are seeing welcome progress.
Work is underway to improve market conduct practices, both within individual firms and through market-wide initiatives, including the global effort to develop a single code of conduct for the FX market through the Bank for International Settlements (BIS) Markets Committee working group on FX markets.
While many index providers and end-users have increased their focus on the due diligence around FX benchmark use, there is scope for greater follow-through on this on the part of some market participants.
ESMA issues guidelines on Alternative Performance Measures
ESMA has issued guidelines on Alternative Performance Measures (APM) for issuers, other than States, whose securities are admitted to trading on a regulated market and who are required to publish regulated information as defined by the Transparency Directive and persons responsible for the prospectus under article 6(1) of the Prospectus Directive. The guidelines are aimed at promoting the usefulness and transparency of APMs included in prospectuses or regulated information. Adherence to the guidelines will improve the comparability, reliability and/or comprehensibility of APMs. Issuers or persons responsible for the prospectus which comply with these guidelines will provide a faithful representation of the financial information disclosed to the market.
ESMA sees progress in reform of EU credit rating industry
ESMA has published two sets of Technical Advice and a Report on the regulation of credit rating agencies (CRAs) in the EU. These papers provide an overview of competition and give insight into the market dynamics of this industry. They also consider measures to provide stronger controls around credit ratings for structured finance instruments and to reduce reliance on credit ratings.
ESMA publishes final report on draft technical standards on credit derivatives clearing obligation
EMIR requires ESMA to develop draft regulatory technical standards (RTS) in relation to the clearing obligation. ESMA consulted stakeholders with a discussion paper and four consultation papers. The final report incorporates the feedback received to the consultation on the CDS classes and explains the reasons for reflecting or not the stakeholders proposals to the draft RTS. It follows the same structure as the consultation paper.
Section 3 provides explanations on the procedural aspects of the clearing obligation. Section 4 provides clarifications on the structure of the classes of OTC credit derivatives that are proposed for the clearing obligation. Section 5 covers the determination of the classes of OTC credit derivatives that should be subject to mandatory clearing. Section 6 presents the approach for the definition of the categories of counterparties, and the proposals related to the dates from which the clearing obligation should apply per category of counterparty. Section 7 provides explanations on the approach considered for frontloading and the definition of the minimum remaining maturities of the contracts subject to it.
The final report is submitted to the European Commission for endorsement of the draft RTS presented in Annex III. From the date of submission the European Commission should take the decision whether to endorse the RTS within three months.
ESMA publishes final report on the Possibility of Establishing One or More Mappings of Credit Ratings Published on the European Rating Platform
The report analyses the possibility, cost, and benefit of establishing one or more mappings for the European Rating Platform (ERP). The objective of a mapping is to assist the user in comparing ratings assigned by different credit rating agencies (CRAs) to the same entity or instrument. Three policy options are considered:
Mapping by harmonising existing rating scales;
Mapping by comparing ratings of different CRAs based on past performance;
Refraining from mapping and letting the ERP user carry out assessments independently based on available tools and data.
The report concludes that the first option is unlikely to yield the desired benefits, as harmonised rating scales would misrepresent credit ratings in light of different rating methodologies.
Furthermore, the report concludes that the second option, can be carried out in several different ways with different outcomes depending on the applied assumptions and the specific parameters of comparison. However, one single way of mapping would not be appropriate for every rating user at every point in time. Based on experiences from other mapping exercises, option two is also likely to be costly.
Consequently, the report recommends that the European Commission takes no further action at this point in time and that a mapping is not carried out for the ERP. Instead, ESMA should focus on continually updating and improving the information, data and tools which ESMA makes available on CEREP and ERP (the third option), thus allowing users of credit ratings to carry out their own research and analysis adapted to their individual needs and interests.
ESMA publishes Q&A on implementation of EMIR
On 1 October ESMA published a Q&A document on the implementation of EMIR with the purpose of promoting common supervisory approaches and practices in the application of EMIR. It provides responses to questions posed by the general public, market participants and competent authorities in relation to the practical application of EMIR. The content of the document is aimed at competent authorities under EMIR to ensure that in their supervisory activities their actions are converging along the lines of the responses adopted by ESMA. It should also help investors and other market participants by providing clarity on the requirements under EMIR. The first version of this document was published on 20 March 2013, subsequent updates have been published on a regular basis. This document is expected to be updated and expanded as and when appropriate.