The European Securities and Markets Authority (ESMA) has launched a level II consultation on its technical standards under the EMIR, which is aimed at improving the functioning of OTC derivatives markets in the EU. EMIR aims to achieve this by reducing risks via the use of central clearing and risk mitigation techniques, increasing transparency and ensuring sound and resilient central counterparties (CCPs).
Such legislation takes the form of a regulation and therefore will not require implementation in the Member States. It is envisaged that the final version of EMIR is expected to come into force from January 2013, with implementation to come in over the first half of 2013 and existing CCPs will have 2 years enforcement to apply for recognition. When enacted, it will have a huge impact on OTC derivatives trading, requiring them to be either reported or cleared through a CCP. Financial institutions impacted by EMIR includeMiFID investment firms and alternative investment funds managed by an AIFM within AIFMD.
Although the details of the final set of rules have not yet been finalised, it is important for fund managers to start planning for EMIR. Important things to stay on top of are:
• Reporting obligations, including strict deadlines, appropriate format and information to be included in the report; and
• Risk mitigation techniques including portfolio reconciliation, collateral and marking-to-market
One of the most obvious consequences for hedge funds will be the increased trading costs that managers will be faced with for OTC transactions, as both cleared and non-cleared OTC derivative trades will be subject to increased reporting obligations. Operational aspects and compliance resources will be stretched but advance planning early on will help, with the more nimble funds finding that they will need to invest a lot more in compliance individuals and back-office staff.
