As if the Winter storms weren’t enough, EMIR is here
Even for your usual dreary January and February, the recent headlines over the past few months (at least in some of the financial publications we work with) have been gloomy beyond belief. This is because tomorrow marks the deadline for the European Market Infrastructure Regulation (EMIR), one of the biggest pieces of legislation to be passed through Brussels successfully, whereby all derivative users, including corporations and smaller financial institutions, will have to report specific trade information to trade repositories. Market participants are worried that we’re not going to be ready for it, and the media has gone into a frenzy: “Bankers fret as Emir deadline approaches” read one Financial News article, and an article appearing on Risk.net reported “Emir reporting deadline causes alarm among commodity traders”. It’s not looking happy out there.
It will be interesting to sit back and watch what actually happens. It is rumoured that while regulators will be imposing fines on those firms that do not comply in time, the FCA recently came out to say that because of an expected EMIR “bedding in” period, they will not now be handing out fines, apart from very severe cases. And with EMIR reporting perhaps not starting on time, this could mean that regulators will not have access to full sets of data that will allow them to monitor systemic risk, which after all is the point of EMIR. At this stage, it’s hard to say exactly what will happen – will regulators get what they want as the industry smoothly starts reporting all derivatives trades? Or will it be the staggered, unapproved approach that much of the industry is expecting? Probably the latter (as without fines, there is no incentive to start this on time).
There is no question about where the problems lie, too. Companies that are used to handling a large amounts of derivatives trades – namely the banks – are broadly fine with what they need to do come Wednesday, 12 February. It’s the hundreds of thousands (we’ve even heard “millions”) of smaller corporate and buyside entities that now have to take on the responsibility of reporting derivatives trades, something that they relied on their dealers for in the past. And coupled with the fact that this is completely new territory for these firms, the new operating costs of reporting trades are anticipated to significantly impact their revenues (and returns for end-investors, in the case of the buyside firms).
Next week will perhaps be the time to reflect on how firms are actually responding to this regulation. It’s the worst kept secret that many firms are simply not prepared – while derivatives regulation in the US was staggered into place, EMIR is perhaps going to be a textbook example of the challenges associated with imposing a European regulation across a supranational region. Something else that the build up to EMIR shows is the significant amount of firms that this regulation touches and, therefore, the number that will need to do something about it. For the many people out there who are, as of tomorrow, responsible for derivatives reporting, this weekend perhaps can’t come soon enough…