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EU Derivatives Regulation: Light at the end of the tunnel

Earlier this year we reported on European Union proposals to regulate the market in over-the-counter (OTC) derivatives and to require certain OTC derivatives trades to be cleared through a central counterparty (CCP). We warned that the EU proposals, unless amended, could lead to price increases in certain OTC derivatives products and might affect some businesses who use derivatives products to mitigate their core business risks. Half a year on, what has happened to the proposed regulation, and what is likely to happen next?

Progress Report

In May, the EU Parliament's Economic and Monetary Affairs Committee (ECON) voted on the draft of the European Market Infrastructure Regulation (EMIR), the proposed legislation which will regulate the OTC derivatives market in the EU. Although ECON approved the draft legislation, it called for a full Parliamentary vote on it, creating a much longer legislative process.

In approving the draft legislation, ECON also accepted an important amendment which the pensions industry across the EU had lobbied hard for. A moratorium would be granted to pension funds, allowing them a three year grace period before the new regulations would affect them. Although the moratorium will still need to make it into the final form of EMIR its acceptance by ECON is a significant step - many other amendments proposed by special interest groups were not supported.

ECON also accepted that the legislation would not have retrospective effect, meaning that OTC derivatives transactions entered into before EMIR comes into force will not have to be centrally cleared. This addressed a significant concern expressed by those in the industry about the cost and other implications of having to centrally clear trades which had already been entered into.

In the meantime, events in Greece and their effect on the wider eurozone preoccupied the EU institutions and EMIR waited in the wings.

A flurry of activity in September saw several revised drafts of EMIR produced as the EU institutions sought to reach a compromise on acceptable wording. Discussions continued but agreement was not reached on a number of key issues.

Where are we now?

Discussions are continuing amongst the EU institutions involved in finalising EMIR and the legislation is expected to be agreed by the end of this month. The process of agreeing the legislation has taken longer than expected and EMIR is now not expected to come into force until 2013 at the earliest.

Those businesses who are affected will need to look carefully at the final form of EMIR and begin to prepare for its implementation. Among those who will want to look carefully at whether they will be affected are property funds and other property investors and private equity funds, who may find their interest rate hedging arrangements fall within the scope of EMIR and are subject to central clearing. Pension funds will also want to ensure that they are able to benefit from the moratorium, if it survives into the final form of the legislation.

We will publish further information on EMIR once the final form of the legislation is published.

For further information on EMIR please speak to your usual Pinsent Masons contact or email Lucy Shurwood : lucy.shurwood@pinsentmasons.com.