EACT/Raeburn: The EMIR confrontation between the European Parliament, Commission and ESMA

31 January 2013

Raeburn offers some home truths on 'short-sighted' financial regulatory proposals.

Raeburn writes: "I blogged previously on the challenge from ECON in the European Parliament to the detailed rules drafted by ESMA for the implementation of EMIR. Since then a huge number of emails and draft documents have flown around; it’s a real struggle to keep track of who is trying to achieve what – quite apart from speculating as to what might be the outcome.

Maybe it’s time for some home truths. As an amateur observer of the Brussels scene but one with a commitment to fight the corner for the ‘real economy’ in highlighting short-sighted financial regulatory proposals, I note the following:

1. There is a significant element of ‘politics’ in this, even if the motivation is I believe largely non-partisan. I’m told that members of ECON are determined to flex their muscles vis-à-vis ESMA and therefore the Commission.
2. However the MEPs have done their homework and should be credited with this. They argue through the amendments that ESMA has gone beyond its authority from the Level 1 content of EMIR. The chair of ESMA, Steven Maijoor, vigorously denies this in a letter he wrote on 28 January to the chair of ECON, Sharon Bowles – insisting that the drafting for which he is responsible is ‘in line with the Level 1 text’.
3. Maijoor’s letter (equally vigorously) insists that there is a coherence and balance within the ESMA rules as they impact non-financial counterparties; so his challenge back to the MEPs seems to be that if you reject one rule (such as the use of gross rather than net positions) you are putting back into play all the other rules – the equilibrium will have been upset.

From the standpoint of non-financial counterparties does this spat between European institutions – if that is what it really is – matter greatly? I would argue that the answer may be largely no – it matters not greatly.

There is one exception to this and that is with the rule on asset class breaches. We and others argued from the outset that it would unhelpful to have the clearing obligation triggered across all asset classes in the event of a single class breach. ESMA disregarded this and wrote the rules in such a way that one breach puts all the entity’s transactions into clearing. The ECON amendments include the challenge that this is in breach of Level 1. Maijoor’s letter to Bowles rejects the challenge, insisting that the approach is consistent with Article 10(3) of EMIR.

The less than veiled threat within Maijoor’s letter is that non-financial counterparties will be worse off (through more restrictive rules) if the coherence and balance of what ESMA has drafted is upset through Parliament’s rejection of the detail.

This should be of concern. But it has to be said that for the great majority of non-financial counterparties such a change would be largely irrelevant. The good news is that ESMA’s drafting – and the content of EMIR – allows for sensible recognition of legitimate hedging (risk mitigation) by corporates and excludes such transactions from the clearing obligation. So long as that fundamental approach remains intact, which it surely must do, non-financial counterparties should be relatively relaxed.

The exception to this relatively relaxed view of the current shenanigans between ECON and ESMA is of course the group of corporates with a combination of conventional treasury risk mitigation and of trading activities (the energy companies, most obviously). For them the asset class breach rules become much more relevant and for that reason if for no other I continue to believe that this is the single ‘hot’ issue in the current debate."

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