ESMA consultation on technical standards for OTC derivatives
3 August 2012
The European Securities and markets Authority (ESMA) has been consulting on its technical standards for regulating OTC derivatives trades under the EMIR regulation. Following lobbying by treasury associations, EMIR provides that non-financial OTC derivatives are not subject to the clearing obligation when they are a) hedges or b) not hedges, but under defined thresholds.
At the point where the clearing thresholds are exceeded, the clearing obligation would apply to all future OTC derivatives. The ESMA paper sets out the requirements for the application of exemptions to non-financial counterparties. Whilst we are encouraged that some of our comments to ESMA’s earlier consultation have been taken on board, there are still some areas where further clarification is required.
The ACT has responded to ESMA flagging certain issues including that
1. Breach of threshold under one asset category should not result in mandatory clearing applying to all asset classes
2. Hedges of stock option plans do not get treated as hedges and so count towards use of threshold amounts
3. Derivatives that are collateralised should not count towards the threshold
4. The definitions covering hedging need refining
5. Clarity is needed as to whether intra-group derivatives count towards thresholds
6. The procedures for claiming intra-group exemptions from collateral need refining
7. The reporting of all intra group derivatives represents a huge burden for companies and regulators alike
8. The reconciliations and confirmation requirements, although good practice, could be difficult for non financial companies to meet