Kangaroo Group – EMIR
EMIR has been held up by many over the past few years as an example of good crisis legislation. I have heard the Commission, Parliamentarians, ESMA and even the most truculent of Member States claim this.
Yet I don’t believe this is because we got it all perfect when the political text was finished in trilogue. I believe it’s because the new institutional framework for financial services regulation in the Lisbon Treaty for delegated acts and the powers given to ESMA have proved themselves flexible enough to be adapted as experience and evidence came to light that showed the best way of getting things done.
That’s not to say the level 1 text has been breached or contravened – I don’t think it has – but that smart individuals from both the public and private sector have worked in the context of a positive political situation to get things done. We have all been committed to making EMIR work.
In that vein I'd just like to touch on a few areas that we could do better, perhaps mindful that the clearing obligation delegated acts are soon due from the Commission and also remembering that the EMIR review is just around the corner in 2016!
One area the Parliament always had very practical concerns was back-loading, or rather, frontloading as it later became known.
For me, the idea of retroactive application of legislation goes so against everything that I believe about good regulation, it was a non-starter. This was an area where trilogue was influenced by US regulators intentions in this regard which was subsequently dropped.
But the Commission, and particularly Commissioner Barnier, persuaded us that it was possible to use this provision and ensure legal certainty to derivative instrument users, particularly non-financials, about how margining would be done on this basis.
I trust that the Commission is still committed to that promise.
Looking ahead to the review of EMIR, there is one key element that I will be looking to evaluate that concerns the pension fund exemption.
The reason we exempted pensions on a three plus two plus one basis was because, at the time, CCPs could not accept many bonds as collateral for margining purposes, and we did not want already stretched pension funds to be forced to liquidate sustainable assets in favour of cash to be sent to CCPs. The reason for the cut-off date was to encourage CCPs to accept different types of assets as collateral.
What I would therefore seek to evaluate is whether CCPs are now accepting more as collateral, or not.
I’m told the very practical reasons behind why they were unable to do so in the past, still exist, and are unlikely to be overcome. But I look forwards to receiving an evidence based piece of analysis from the Commission and ESMA to prove this and if it is shown that for stability of the critical market infrastructure it should not broaden its non-cash collateral base then we should permanently exempt the pension funds.
Finally, under the heading of ‘lessons learnt from EMIR implementation’ – I would like to talk about reporting provisions.
For me, this is the most essential element of EMIR. The part that would show supervisors the interconnectedness of the derivatives markets and allow them to better identify systemic risk before it became a problem that was too big to solve.
Yet the big bang approach of one date for everyone to comply with reporting provisions was beset with difficulties, which resulted in a lot of perfectly understandable noncompliance.
The lesson I take from this, for the Securities Financing Transactions regulation in particular, is that phase in of certain provisions is not a way of letting market participants off complying with rules fro longer, but a necessary and practical method of allowing industry time to build new infrastructure and conduct proper testing before gradually introducing it to the whole market.
I think this will encourage more and better compliance and actually give supervisors the data they need to supervise the markets more efficiently.
So, all in all, I do believe that EMIR has been a success. But we are not there yet. We still have big outstanding issues with the clearing obligation, and I didn’t even mention the third country problems of how to apply capital charges to non-qualifying CCPs and the elephant in the room of US equivalence.
There is still lots to be done, and I and my fellow Parliamentarians will be watching and scrutinising all aspects very closely.