Market Dynamics Report

JANUARY 29 2013

EMIR - The countdown begins

On December 19th the European Commission adopted the European Market Infrastructure Regulation (EMIR) technical standards as proposed by the European Securities and Markets Authority (ESMA). While initially it looked like it was going to get quick sign-off by the European Council and the European Parliament (EP), it now looks like the EP is set to raise an objection on at least some of the standards in a vote on Feb 4th.  More on their objection later, first some background.

For European Energy Companies, known as Non-Financial Companies (NFC) in EMIR, the most significant near-term implication in the proposed standard is the EMIR Clearing Threshold which for commodities is set at EUR 3Bn of gross notional globally, excluding hedging by the proposed standards.

Being over the threshold makes a firm NFC+ which brings with it several requirements. Perhaps the most significant in the near-term is it requires firms to immediately notify their national financial regulator that they are over the threshold, it also requires daily mark to market and margining of bilateral trades when the rules are finalised near the end of 2013. Also, if the clearing obligation is in place for a product they must clear if they trade with a Financial Company or another NFC+ firm. However this latter requirement is mostly a medium/long-term issue as the first clearing obligations for Credit Derivatives and Interest Rates are only expected form mid-2014, energy commodities would be sometime after that and even then only for the most liquid contracts if at all.

All of this is a significant cost and burden to non-financial firms, this includes not just energy companies but all corners of the economy that use derivatives, from airlines, to food and chemical companies. Non-financial firms have argued they don't pose a systemic risk and should not be covered by EMIR.  The EP has heard this message and instructed the Commission and ESMA not to impose an unnecessary burden on non-financial companies. The potential EP rejection of EMIR is on the basis that they don't believe the Commission has followed this instruction closely enough.

It's difficult to say what the outcome will be, as the rejection lacks precedent. But it's reasonable to expect a delay of anywhere from a couple of months to up to six months. It's also worth pointing out that at this stage it doesn't appear to delay or impact the reporting obligations under EMIR.