Derivative regulatory changes in 2014

What have been the key regulatory changes for derivatives lawyers in 2014? Simon Puleston-Jones, chief executive office of the Futures and Options Association (FIA) Europe highlights the key changes of 2014 and what to look out for in 2015.

What have been the main regulatory changes affecting derivatives lawyers in the UK this year?

The overarching challenge of 2014 (which will continue in 2015 and beyond) has been the need for a huge number of over-the-counter (OTC) transactional lawyers to become cleared derivative and regulatory experts due to the changes in the European Market Infrastructure Regulation (EU) 648/2012 (EMIR) and the Markets in Financial Instruments Regulation (EU) 648/2012 (MiFIR). The world in which they have worked up to now has irrevocably changed.

More specifically:

EMIR

Delegated reporting agreements and reporting queries more generally

  • familiarisation with/negotiation of swaps clearing documentation
  • working to find solutions to indirect clearing under EMIR and MiFIR
  • working with internal and external stakeholders to lobby on the frontloading and mandatory clearing requirements
  • identifying, understanding and explaining the impact of extra-territorial legislation on their business
MiFID II/MIFIR

Responding to the European Securities and Markets Authority (ESMA) discussion paper and consultation paper over a ten-week period in the summer (845 pages, 860 questions) and the 1600 pages just published by ESMA on 19 December 2014. For lawyers working at commodity trading and energy companies that are not regulated under MiFID I, understanding and explaining the impact on their firm if it becomes subject to regulation under MiFID II.

Capital Requirements Directive IV (CRD IV)

Liaising with internal and external stakeholders to help the business better understand the impact of the regulatory capital requirements and leverage ratio constraints set out in CRD IV 2013/36/EU, and to understand and express its impact on firms providing clearing broking services.

Regulation on wholesale energy markets integrity and transparency (REMIT)

Engaging with the Agency for the Cooperation of Energy Regulators regarding their reporting requirements for the wholesale physically settled energy markets under REMIT (EU) 1227/2011.

Benchmarks

Staying on top of the latest UK and European proposals, as expressed (in the UK) in the Fair and Effective Markets Review and (in Europe) in the European benchmark proposals that have been led by the Italian presidency.

How has the market dealt with reporting under EMIR having gone live in February 2014? Has there been a different impact for OTC and exchange-traded derivatives (ETD)?

The market has done as well as can be expected in the absence of clear answers to very granular questions. It took some time to register for legal entity identifiers (LEI)—many still need to obtain an LEI. Different ways of generating unique transaction identifiers (UTIs) has led to problems, as have the lack of successful reconciliation between trade repositories—only 3% of ETD trades are reported to have been matched and, for some months, one of the major repositories refused to even attempt to match trades with other repositories. ESMA is still not satisfied that the details submitted with respect to unique product identifiers are sufficiently granular.

ETD reporting has been less successful than OTC (as ESMA made clear it would be to the European Commission when asking for a delay to the start of ETD reporting) in absolute terms for the reasons stated above. However there have also been some ETD-specific issues relating to reporting of ETD valuations that have led to further issues.

What are going to be the key issues for FIA Europe and its members in 2015?

In no particular order:

  • MiFID II/R—responding to consultation, advocacy, implementation
  • EMIR—the review by the European Commission, indirect clearing, mandatory clearing/frontloading
  • central counterparty recovery and resolution—we look forward to the publication of the European Commission's proposals
  • benchmarks—keeping a close eye on the Latvian's development of the new proposed legislation
  • Fair and Effective Markets Review—responding to the consultation and following up with the UK regulators/International Organisation of Securities Commissions/Financial Stability Board
  • the economics of clearing—continuing to advocate for changes to the regulatory capital regime, especially the leverage ratio, to promote central clearing
  • global coordination of regulation—working with regulators to promote a more coordinated international approach to regulation
  • capital markets union—working with the European Commission to highlight the important role that derivatives needs to and does play in their proposals
  • financial transactions tax

Interviewed by Emma Millington.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

First published on LexisPSL Banking & Finance. Click here for a free trial.

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