Financial Derivatives: Commission adopts new rules to mitigate risks in non-cleared OTC derivative transactions

Following the financial crisis, rules on the central clearing of derivatives were introduced as part of global efforts to mitigate systemic risks to financial stability. To that end, the EU introduced legislation for the regulation of over-the-counter (OTC) derivatives in 2012, known as the European Market Infrastructure Regulation or EMIR. EMIR required certain derivatives to be centrally cleared to reduce risks. The first clearing obligations came into operation this year. For those derivatives not centrally cleared EMIR requires bilateral exchange of collateral to mitigate risks. This is why the Commission has today adopted a new set of rules, which sets out the levels and types of collateral that OTC derivatives counterparties must exchange bilaterally if the transaction is not cleared through a Central Clearing Counterparty (CCP). Should one counterparty to the transaction default, the margin collected will protect the non-defaulting counterparty against resulting losses. The draft regulatory technical standards (RTS) under EMIR were submitted jointly by the three European Supervisory Agencies (ESAs). The Commission decided to endorse these standards with certain amendments, in particular concerning the concentration limits for pension scheme arrangements and the timeline for implementation. Today’s decision takes the form of a Delegated Regulation and is now subject to an objection period by the European Parliament and the Council after which it will be published in the Official Journal. The implementation of the rules will begin one month after the entry into force of the Delegated Regulation.