EMIR + OTC Derivatives + TCEs = some TLC required?

EMIR + OTC Derivatives + TCEs = some TLC required?

ESMA recently published a consultation containing long-awaited proposals for the extension of EMIR rules to third country entities (TCEs) in relation to over-the-counter (OTC) derivative transactions. With ESMA requiring responses by 16th September, Betsy Dorudi, a senior manager in PwC’s Financial Services Regulatory Centre of Excellence, highlights the potential impact.

What are the new rules about, in a nutshell?

The proposals aim to clarify the conditions in which EMIR provisions relating to clearing or risk mitigation techniques would apply to OTC derivatives by two non-EU counterparties which have a substantial effect in the EU.

Proposals running nearly a year behind schedule

EMIR applies to financial and non-financial derivative counterparties established in the EU and requires them to comply with three sets of obligations: to clear all derivatives subject to mandatory clearing (art 4) or for non-centrally cleared contracts, to apply risk management processes (art 11) and to report all derivative transactions to trade repositories (art 9).

ESMA published a consultation on 17 July 2013, ‘Draft Regulatory Technical Standards—Contracts having a direct, substantial and foreseeable effect within the Union and non-evasion of provisions of EMIR’, containing proposals to extend the EMIR clearing and non-centrally cleared obligations to transactions between entities established outside the European Union, known as TCEs. While the EMIR primary legislation states the high level principles under which the rules can be extended, stakeholders have waited over a year for a first look at proposals which set out the specific criteria to identify which TCE transactions fall in scope.

ESMA was due to deliver its final proposals to the EC on 30 September 2012, but the European Commission (EC) instructed ESMA to delay development until the EU could coordinate its extra-territorial proposals with US and other international rule makers. Rule makers needed to coordinate key aspects of their extra-territorial regimes. They needed to agree the circumstances in which their extra-territorial rules should apply, to ensure that trading which takes place outside their territorial or other direct jurisdiction, but has

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