The text of the legislative proposal for EMIR, originally proposed of the European Commission on 15 September 2010 (COM(2010) 484 final), being analysed in the post ‘The implications of the European Market Infrastructure Regulation (EMIR) for commodity firms trading on the emissions market’, has been substantially changed by the European Parliament on 5 July 2011 (ordinary legislative procedure: first reading).
The modifications made are far-reaching and in a particular way influence on the position of the commodity firms trading on the emissions market. Beneath a cursory review of the main amendments to the draft EMIR by the European Parliament on 5 July 2011 with focus on those particularly relevant for non-financial counterparties.
The following remarks should be read being mindful of the general fundamental assumption that not all CCP-cleared OTC derivatives can be considered suitable for mandatory CCP clearing and that the clearing obligation relates only to OTC derivative contracts which are considered eligible for clearing in the published ESMA decision. The Regulation establishes detailed procedure for taking decisions concerned, in particular provides that before taking a decision, ESMA shall conduct a public consultation and, where appropriate, consult with the competent authorities of third countries. Any decision of the ESMA on the subject will be published in a register accessible on the ESMA’s website. That register will contain the eligible classes of derivatives and the CCPs authorised to clear them.
The definition of the OTC derivatives was amended by the European Parliament in such a manner that currently mean derivative contracts whose execution does not take place on a regulated market or on a third-country market considered as equivalent to a regulated market or on any other organised trading venue established under Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading in a regulated market that clears such contracts through a CCP.
One should also be mindful of the fact that the number of amendments made on the 5 July 2011 is considerable and those mentioned beneath are only part of them. The selection made is the result of the subjective views of the author as regards significance of amendments in the context of the regulatory position of non-financial counterparties.
1.1. The fundamental switch in approach to the obligations of non-financial counterparties - in comparison with the European Commission of 15 September 2010 - is that the information threshold in the European Parliament version of the EMIR is irrelevant. A non-financial counterparty are currently subject to the reporting obligation in full extent, the same as financial institutions. Consequently all derivative contracts entered into by the non-financial counterparties are to be reported to a trade repository registered by ESMA. According to the clear indication in recital 23 in the preamble to the Regulation, in order to allow for a comprehensive overview of the market and for assessing systemic risk to trade repositories should be reported both cleared and non-cleared contracts.
1.2. Counterparties should report the details of any derivative contract they have entered into and any material modification, novation or termination of the contract. The agreed termination of a contract or lapsing of a transaction – as opposed to its premature termination – shall not be considered as a modification.
1.3. The recordkeeping obligation for a period of five years of all the information needed to report was also introduced.
1.4. In the context of reporting it is appropriate to add that according to the explicit provision of the draft Regulation a counterparty that reports the full details of a contract to a trade repository on behalf of another counterparty shall not be considered in breach of any restriction on disclosure of information imposed by that contract or by any legislative, regulatory or administrative provision. No liability resulting from that disclosure shall fall on the reporting entity or its directors or employees or other persons acting on its behalf.
1.5. The deadline for the submission of the report is the working day following the conclusion, modification, novation or termination of the contract (small comment is appropriate in this place as regards imprecise terminology of the draft: this provision contains the term: ‘working day’ although farther in the same context uses and defines ‘business day’ and once more repeats the regulation concerned).