27 August 2012

ALFI comments on ESMA's consultation on its technical standards for the Regulation on OTC Derivatives, CCPs and Trade Repositories

ALFI suggests that ESMA should analyse the possibility to request more synthetic information and think about the frequency at which the trade information should be refreshed, especially on collateral and valuation elements.

EMIR aims to achieve this by reducing risks via the use of central clearing and risk mitigation techniques, increasing transparency via trade repositories (TR) and ensuring sound and resilient central counterparties (CCPs). ALFI welcomed the European Securities and Markets Authority Consultation Paper and ALFIlcomed the opportunity to provide its comments and expertise to the ESMA work stream on this issue.

In a general matter, ALFI would like to point out that the draft regulatory technical standards on OTC derivatives (the “Technical Standards”) do not take sufficiently into account the specificities of UCITS as investment vehicles made available to the public.

ALFI assumes that UCITS will typically act as indirect clients as referred to in Article 2 Paragraph 1 of the Technical Standards. The Technical Standards aim, in particular, to ensure that indirect clients benefit from equivalent protection as clients. Pursuant to number 4 of the recitals of the Technical Standards, an indirect clearing arrangement should ensure that appropriate safeguards are in place against client failure. Nonetheless, in an event of a default of the client/clearing member, UCITS do not seem to be sufficiently protected by an indirect client arrangement as provided in Chapter II of the Technical Standards. On the one hand there are at national level some important laws, such as, for example, insolvency laws which have different requirements and different scopes of protection.

UCITS structures come typically in contact with a large number of different national laws. As particular, UCITS can enter into OTC derivatives contracts with counterparties/clients in different jurisdictions. It seems to be difficult to take all these aspects from the national laws of all involved resident states into account.

On the other hand, it has to be questioned if the protection which is intended to be ensured by the Technical Standards can be extended to indirect clearing arrangements with clients or clearing members domiciled outside of the EU. ALFI regrets that the rules do not take into consideration the specificities of UCITS as investment vehicles made available to the public. UCITS collect investors' monies and are highly stable investment vehicles that invest into securities and OTC derivatives for the benefit of retail and institutional investors. OTC derivatives are only used for efficient portfolio management purposes in UCITS, in particular to cover the credit, interest rate or other similar risks linked to the investments held by the funds. ALFI therefore thinks that the low risk levels of UCITS should be reflected in the regulation and ALFI suggests that UCITS benefit from more flexible rules regarding collateral requirements.

Collateral requirements for UCITS should therefore be adapted to lower the extra cost this would generate for them and also enlarge the types of acceptable collateral. UCITS are usually fully invested and do not hold cash at sight. Eligible collateral should therefore include corporate bonds and equities as an example. UCITS have diverse investment strategies and restricting collateral types would increase the cost of funding appropriate eligible collateral. In case a UCITS does not hold appropriate collateral as part of its investment strategy, the cost of funding eligible collateral will be high and would potentially impact end investors.

Full comment letter

© ALFI - Association of the Luxembourg Fund Industry