06 September 2013

EBF: Third country application of EMIR

At this moment, European banks are drafting EMIR documentation in order to comply with EMIR requirements. In this respect, the application of EMIR in relation to third country counterparties and for third country branches of European banks constitute major challenges to meet in terms of compliance requirements.

Many European banks have indeed outstanding (OTC) derivatives contracts with third country counterparties. EBF understands that also third country branches of European banks are in scope of EMIR. This, of course, triggers extraterritoriality issues. In practice, European banks with third country branches will be confronted with duplicate or even conflicting regulations. As a result, the third country branch will not be able to simultaneously comply with EMIR and the regulation in the jurisdiction where the third country branch is located. This would ultimately result in either making derivatives business through third country branches impossible or breaching the law. Both situations should be avoided by all means.

In order to avoid compliance risks and unnecessary costs (because of duplicate regulations) as much as possible, the EBF recommends applying transitional arrangements or relief in relation to transactions with entities located in third country jurisdictions until an equivalence decision has been made. Such relief could take the form of a phase-in of EMIR implementation with third country counterparties or by or with third country branches at a later stage. When there is more clarity on what equivalence/substituted compliance will entail, implementation will be done on the basis of what is agreed between the regulators.

EBF takes note that ESMA has made some proposals in their draft regulatory technical standards on contracts having a direct, substantial and foreseeable effect within the EU and non-evasion of provisions of EMIR, which are open for public consultation at present. EBF is however concerned that these may not prove to offer a satisfactory solution from an operational point of view.

EBF understands that the Commission has made this issue a priority for the second half of this year. In this respect, EBF considers the progress made by the European Commission and the CFTC with regard to the application of equivalence/substituted compliance as stated on 11 July 2013 as a positive development and an important step forward in the right direction and EBF would like to express our strong support to the European Commission in these negotiations.

EBF would also like to ask ESMA, in the context of the drafting of regulatory technical standards, to take account of the proposed framework being worked out jointly by the European and US authorities.

EBF finally urges the European Commission to rapidly pursue this way of attuning European and US derivatives regulation with other third countries as well, as the issue of extraterritoriality is not limited to the situation with the US but goes beyond given that the derivatives market is a global one.

Full letter

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