EMIR stands for “European Market Infrastructure Regulation” and has been passed on December 19th, 2012 and enacted on March 15th, 2013. The European Market Infrastructure Regulation is an EU regulation aimed at reducing systemic counterparty and operational risk and thereby prevent future financial system collapses. Its focus is regulation of over the counter (OTC) derivatives, central counterparties, and trade repositories. It provides steer on reporting of derivative contracts, implementation of risk management standards and common rules for central counterparties and trade repositories. The regulation was initially adopted in 2012 and an amended version, the so-called “EMIR Refit” regulation, was later adopted in 2019. EMIR was introduced by the European Union (EU) as implementation of the G20 commitment to reduce systemic, counterparty and operational risk, and increase transparency in the OTC derivatives market. It was also designed as a preventative measure to avoid fallout during possible future financial crises like the collapse that followed the Lehman Brothers bankruptcy in 2008. It establishes common rules for central counterparties, which interpose themselves between involved parties in a contract to serve as the focal point of each trade, and trade repositories, which collect and maintain all records of trades. EMIR requires the reporting of all derivatives, whether OTC or exchange traded, to a trade repository. EMIR covers entities that qualify for derivative contracts regarding interest rate, equity, foreign exchange, or credit and commodity derivatives. It also outlines three sets of obligations, including the clearing, reporting and risk mitigation of applicable products.
Does EMIR work (in practice)?
This is a question often raised by treasurers who doubt the use made of the data collected by the Trade Repositories (TRs) and consolidated by ESMA. Having worked in a company controlled by its national supervisor, I can say that yes, it works. They do have the information on all the OTC derivatives traded. What they will or would do with the information is another thing. But at the very least, having the data, the EU could act and prevent systemic risk. Treasurers and their associations have certainly fought against certain measures, and rightly so, such as the obligation to post collateral, the reporting of inter-company OTC transactions, etc. But they have never questioned the EU's objective. We all want an economy that is less susceptible to systemic risks and more resilient, if the price is and remains reasonable. This is where EACT's activism has been crucial and successful. But as always, winning battles is not enough. The struggle continues, because with each crisis, the question is how to change the rules to prevent the next one. Change for the sake of change is not advisable, however. The best is the enemy of evil, as the saying goes.
Changing for changing or real need for?
The EU could be tempted to take certain measures such as, for example, going back on the definition of "hedging" in the context of collateral exemptions, on the exemption of reporting of inter-company transactions, on the "thresholds" set for exemptions by asset class, not renewing the exemption for pension funds, etc. We must fight against the danger and the risk of pretending to change to better protect and disrupt what is working rather well. We must also avoid generalizing the exceptions and mixing up the issues. It is to be feared that politicians are morally obliged to take measures to show that they are reacting. But not just any measures, please.
In a dramatic situation, strong reactions!
What we must fear is an overreaction to the current crisis and more specifically to the problems encountered by a minority (i.e., energy / electricity producers) who on regulated markets (i.e. subject to MIFIR and not EMIR) have been somewhat shaken. Did they overdo the use of electricity futures, for example, forcing them to provide huge amounts of collateral? The solution lies in extending the types of assets considered as collateral (e.g., bank guarantees, other equity assets even if weighted, etc.) and in limiting the amount of collateral. If you exaggerate your outstanding amounts, reduce them. Isn't that the best advice to give? Why did some companies do better than others? That's the answer. "Let's not throw the baby out with the bathwater," we would say in such circumstances. We fear the exaggeration of the response to a one-time, exceptional problem. Also, please do not attack the definition of "hedging" in the context of the collateral exemption. It is principle-based, but to adopt a “rule-based” definition would be a mistake. Again, we ask, why change a winning team? EMIR has a proven track record. ESMA can easily identify what is hedging and what is not through reporting, monitor all external transactions, and track any potential risk. We can always do better. The idea of increasing threshold per asset class would be welcome; although not necessary. However, changing what works remains incomprehensible to a corporate treasurer. We don't like EMIR because of its restrictive nature. Yet we support it for its objectives. But the manner remains important and going too far would be unproductive, create competitive disadvantages and penalize treasurers without giving more comfort or transparency to supervisors. Finally, to attack the pre-trade transparency of transactions is for us, once again, nonsense. We believe the system is sufficiently transparent and efficient.
After ten years, we are finally satisfied. It may not be the anniversary that will make us break out the champagne. However, we are "all-in" satisfied and happy with the situation re. OTC's. EMIR refit for which EACT worked hard (as did EMIR by the way), has improved greatly to be acceptable. Exchange would be inefficient and counterproductive. I don't think I'm a treasurer nostalgic for the good old days without binding regulations. I defend regulations in their logic but regret "political" and poorly targeted decisions that would penalize our profession without providing what they are supposed to guarantee. We must remain confident and hope that we will not have to turn back, collateral victims of a crisis for which we are not responsible.
François Masquelier, CEO of Simply Treasury – Luxembourg
Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).