EMIR: What is it? No, really. What is it?!

As literally everyone who deals with derivatives will know by now is that the European Market Infrastructure Regulation (EMIR) makes no sense grammatically, but has nonetheless been agreed by the all-seeing druids of the European Commission.

The intentions seem laudable enough – to bring increased visibility and tighter security measures to the OTC derivatives market, primarily by forcing  those trades through clearing houses. But behind a relatively simple premise is a great deal of complexity, much of which is either being kept under wraps, or is still seemingly absent entirely.

One of the prime areas of concern being brought into the spotlight is so-called ‘Third-Country Provisions’. Whilst this may sound like some UN foreign aid initiative, it is actually a part of the regulation that covers traders that want to clear EU-based derivatives via non-EU CCPs.

EMIR will permit this in theory, however it does this under the condition that the third country needs an equivalent framework/standard for permission in the other direction. This really begs the question: who decides what ‘equivalent’ is and indeed, what does ‘equivalence’ really mean?

Looking in from outside the table of the policymakers, it would seem that the European Commission feel it is themselves, working alongside the related bodies around the globe, such as the CFTC and SEC in the US. And there is certainly a strong desire internationally for this to happen, so whilst it may be rather glib for now, it is very much a work in progress and as the regulations develop, so too will clarity on this issue.

But is there not a wider implication here? Where is the stopping point? Surely, if all the regulators are agreed on these matters then how long until – much like we are seeing with exchange megamergers over the last few years – all the regulatory bodies begin to merge, too? And if that is the case, is that necessarily an entirely bad thing? Certainly these are things that need to be discussed, but this article is not the place for a thesis on the effects of macro-regulatory unification.

Looking back to the present, the underlying concept behind the Third Country Provision is to harmonise the global clearing house market so that an EU clearing house is not at a direct disadvantage to a non-EU house.

If this sounds familiar, it could be because it bears more than a passing resemblance to the Dodd Frank act in the US. While it hasn’t been admitted directly, on the face of it, it would appear to have taken more than a few leaves out of their regulatory books. Indeed, wording in the US act has similar implications – in Title seven of Dodd Frank it informs us that ‘activity which has a direct and significant connection with commerce in the US will be subject to the clearing (and various other) obligations’.

There is already a distinct concern that putting these types of policies into practice may force the hands of those nations that do not wish to follow their rules. Even if you are outside the EU and/or the US, you might very well still find yourself beholden to their regulatory governance.

To give one real-world example of this, the CFTC has released draft rules around registration, so even if your trade takes place outside the US you may still have to register with American authorities. And if that is the case, then this could mean similar problems, such as theoretically being required to clear in two places at once. Clearly this cannot happen, but what it does do is highlight that these issues are ones that need addressing.

According to a statement by Michel Barnier, EU markets commissioner, EMIR meant that “the era of opacity and shady deals” was over now that the OTC, or off-exchange, derivatives markets were being brought under tighter supervision.

But as we have illustrated in just one of several areas, markets are still in the dark about how this will actually work in real terms. How do you comply with regulation – or even plan your future strategies – when you have no real clarity about how to apply them?

Another area leaving traders with nothing more than a question mark is the definition of ‘standardised’. According to EMIR, standardised derivatives that are deemed eligible must go through clearing houses. This definition will eventually be decided by ESMA (the European Securities & Markets Authority), but that decision is still very much up in the air right now, leaving those out of the debate, out of the loop.

This of course begs a further question: What of those ‘non-standardised’ derivatives? Where are those exceptions? And will those exceptions line up with those in Dodd Frank, etc.? And once we DO know what the exceptions are, will we not just end up in the same situation as we are currently in, the one which regulators and politicians are so keen to avoid? Without almost superhuman attention to currently absent detail, this entire bill has the potential to become little more than a long-winded moving of the goalposts.

Despite the relative fanfare, once you peel away the wrapping, what lies underneath appears to be something of a damp, prohibitively expensive, potentially contradictory and unenforceable piece of legislation that hasn’t even been translated into all EU languages yet, let alone voted through.

Is EMIR, as REM put it so eloquently, the ‘end of the world as we know it’ for OTC derivatives, or is it merely taking them down a more scenic route? Only time, and ESMA, will tell…


The impact of EMIR will be a key topic under discussion at TradeTech Swaps & Derivatives, the conference dedicated to the technology, platforms, connectivity and strategy to trade and clear OTC on exchange, 28-30 May 2012, London. For more info, reports, whitepapers, videos, Q&As and other invaluable content visit tradetechderivatives.com.