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ESMA Publishes Statement on Clearing and Trading Obligations for Small Financial Counterparties

On January 31, the European Securities and Markets Authority (ESMA) published a statement addressing issues on the forthcoming implementation of the European Market Infrastructure Regulation Regulatory Fitness and Performance program (EMIR REFIT), relating to clearing and trading obligations for small financial counterparties. ESMA’s statement also addresses the requirements for reporting of derivatives that were outstanding on or after August 16, 2012, and terminated before the EMIR reporting start date of February 12, 2014, which is a process commonly referred to as “backloading.”

In its statement, ESMA notes that it is aware of the challenges faced by certain small financial counterparties when preparing for the deadline of June 21, to start clearing through central counterparties (CCPs) and trading some of their over-the-counter (OTC) derivative contracts on trading venues. As EMIR REFIT negotiations have not yet been finalized, it is not yet known when the resulting text of the EMIR REFIT is expected to apply. This could result in a timing gap during which small financial counterparties, whose derivative positions are below the clearing thresholds, would need to have clearing arrangements in place and start clearing their derivative contracts, before, once again, they are no longer required to do so after EMIR REFIT comes into force.

ESMA is also aware of the challenges that reporting counterparties would face regarding having to comply with the backloading requirement by February 12. The EMIR REFIT proposals remove the backloading requirement from EMIR to help relevant parties meet regulatory needs, and to reduce the substantial and costly adjustments that reporting entities need to make.

The European Commission previously extended the deadline for the completion of backloading from February 12, 2017, to February 12, 2019. The extension of the deadline was in line with ESMA’s previous recommendation, and the EMIR REFIT was expected to become effective by the new deadline. However, it is still unclear as to whether these amendments would go into effect before February 12, and ESMA is still addressing the backloading requirement with respect to the reporting obligation.

Consequently, ESMA has indicated that it expects national competent authorities (NCAs) not to prioritize supervisory actions towards counterparties’ reporting of backloaded transactions or to counterparties whose positions are expected to be below the clearing thresholds that apply once the EMIR REFIT becomes effective. ESMA also expects NCAs to apply the same proportionate approach to their risk-based supervisory powers in their day-to-day enforcement of EMIR.

ESMA’s statement is available here.

©2019 Katten Muchin Rosenman LLP

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John Ahern, Financial Attorney, London, Katten Law Firm
Partner

John Ahern, partner at Katten Muchin Rosenman UK LLP and head of the London Financial Services group, focuses his practice on banking, financial services, UK and European financial markets, and related regulations. His background in private practice and as in-house counsel at a global investment bank provides him with perspective on the unique regulatory issues facing the wholesale and private banking sectors. John advises multilateral trading facilities, broker-dealers and banks on trading, clearing and settlement as well as custody of securities—both physical and...

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Carolyn H. Jackson, International Attorney, Katten Muchin law firm
Partner

Carolyn Jackson is a partner in Katten Muchin Rosenman UK LLP and is a Registered Foreign Lawyer. She provides US financial regulatory legal advice to a broad range of market participants, including commercial banks, investment banks, investment managers, broker-dealers, electronic trading platforms, clearinghouses, trade associations and over-the-counter derivatives service providers.

Carolyn guides clients in the structuring and offering of complex securities, commodities and derivatives transactions and in complying with US securities and commodities laws and regulations. 

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Nathaniel Lalone, Katten Muchin Law Firm, Financial Institutions Attorney
Senior Associate

Nathaniel Lalone, a partner at Katten Muchin Rosenman UK LLP, has a broad range of experience in the regulation of financial products and financial markets, and frequently provides regulatory and compliance advice to trading venues, clearing houses and buy-side firms active in the over-the-counter (OTC) derivatives, futures and securities markets. He is actively involved in advising clients on the implementation of MiFID 2 and MiFIR in the European Union as well as the international reach of US financial services regulation. He also has significant experience with structuring...

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Neil Robson, private equity fund managers counselor, Katten Law Firm, London
Partner

Neil Robson, a regulatory and compliance partner with Katten Muchin Rosenman LLP, focuses his practice on counseling hedge and private equity fund managers and other investment advisers on operational, regulatory and compliance issues. He regularly addresses Financial Conduct Authority (FCA) and EU authorization and compliance under both the EU Alternative Investment Fund Managers Directive (AIFM Directive) and MiFID, cross-border issues in the financial services sector, market abuse, anti-money laundering and regulatory capital requirements, formations and buyouts of...

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