European Market Infrastructure Regulation (EMIR) : a spotlight on changes affecting the EU OTC Derivative contracts market with a local perspective

Abstract

This thesis aims at providing a better understanding vis-à-vis the profound impact generated by EU post-financial crisis ‘Over-the-Counter’ derivative trading reforms. The European Market Infrastructure Regulation forms part of a wider, international regulatory response aimed at tightening gaps in pre-2008 OTCD legislation and restoring stability in financial markets, by improving post-trade transparency of the formerly opaque OTCD markets and reducing systemic risk via mandatory clearing for CCP-eligible transactions. Such reform however cannot be achieved until consensus on an EU-wide classification of a ‘derivative’ instrument is reached. It is clear that a harmonised application of EMIR’s obligations, especially the reporting obligation, can only be achieved once the EC adopts a true, pan-European definition. Moreover, whilst the benefits of centralising counterparty credit risk in a CCP far outweigh the risks inherent to bilateral clearing and settlement, it remains to be seen whether the transfer of such a large concentration of exposures will be adequately netted and collateralised. Although a number of OTCD transactions will continue to be traded bilaterally, albeit subject to stricter risk-mitigation requirements, EMIR not only revolutionalises the previously unregulated, bilateral OTCD market by requiring any undertaking engaged in OTCD trading to reconsider its existing system infrastructures and documentation to ensure compliance with these ‘newfound’ obligations, but has the potential of undermining the very reason for which such customized, bespoke contracts have been created. Ultimately, insights by a number of local industry participants shed light on the various regulatory gaps which should be addressed.