1.Introduction

The Regulation on OTC derivatives, central counterparties and trade repositories (EMIR) of 4 July 2012 requires, inter alia, the central clearing of all standardised OTC derivatives contracts, the reporting of all derivatives contracts to trade repositories and the implementation of risk-mitigation techniques for those trades which are not centrally cleared.

According to Article 1(4) of EMIR, the Union’s central banks and Union public bodies charged with or intervening in the management of the public debt are exempted from EMIR and are therefore not subject to these obligations.

Under Article 1(6) of EMIR, the European Commission is empowered to amend the list of exempted entities by way of delegated acts if it concludes, after analysing the international treatment of central banks and of public bodies managing the public debt in other jurisdictions’ legal frameworks and informing the European Parliament and the Council of the results, that the exemption of the monetary responsibilities of those third-country central banks and public bodies charged with or intervening in the management of the public debt from the clearing and reporting obligation and the obligation to apply risk-mitigation techniques is necessary.

2.The Commission's previous Assessments

The Commission has carried out two reviews of the international treatment of central banks and other public bodies charged with or intervening in the management of the public debt with regards to OTC derivatives transactions.

The first review concerned the legal frameworks in Japan, Switzerland, the United States, Australia, Canada and Hong Kong and concluded in 2013 that Japan and the United States fulfilled the conditions for the central banks and public bodies responsible for the management of the public debt in those two jurisdictions to be added to the list of exempted entities in Article 1(4) of EMIR.

The second review concerned the legal frameworks of Australia, Canada, Hong Kong, Mexico, Singapore and Switzerland and concluded in 2017 that all those jurisdictions fulfilled the conditions for the central banks and public bodies responsible for the management of the public debt in those jurisdictions to be added to the list of exempted entities in Article 1(4) of EMIR.

3.The Current Assessment

This assessment is triggered by the United Kingdom’s notification on 29 March 2017 of its intention to withdraw from the Union pursuant to Article 50 of the Treaty on European Union. When Union law ceases to apply to and in the United Kingdom, the exemption for Union Central Banks and public bodies charged with or intervening in the management of the public debt in Article 1(4)(a) of EMIR would no longer apply to the United Kingdom central bank or public debt management bodies.

Until the United Kingdom’s withdrawal from the Union, EMIR, including its provisions on the clearing and reporting obligations and risk-mitigation techniques, is directly applicable in the United Kingdom. As part of the European Union (Withdrawal) Act 2018, the United Kingdom on 26 June 2018 incorporated the provisions of EMIR into UK domestic law with effect from the date of the United Kingdom’s withdrawal from the Union. To address failures or deficiencies arising from the incorporation of EMIR into UK domestic law, the United Kingdom will amend or has already amended the Financial Services and Markets Act 2000 (the "FSMA") and the UK domestic law incorporating EMIR, e.g. transferring responsibilities and tasks conferred on the Commission or the European Securities and Markets Authority (“ESMA”) to the Treasury or other UK authorities. The assessement in this report is based on this legal framework.

4.Progress of OTC Derivatives Markets Reforms

Clearing obligation

According to the draft UK domestic law incorporating EMIR, the obligation to clear OTC derivatives transactions would be maintained. The clearing obligation would in principle cover all OTC derivative transactions, with similar exemptions as those applicable under EMIR.

Reporting obligation

Under the draft UK domestic law incorporating EMIR, the obligation to report all OTC derivative transactions would be maintained, including the rules describing which of the counterparties has the responsibility to report the transaction and what information is to be reported.

Risk-mitigation techniques

The draft UK domestic law incorporating EMIR would maintain in place the rules concerning the use of risk-mitigation techniques required for non-centrally cleared OTC derivative transactions, including the rules on timely confirmation of trades, portfolio reconciliation and procedures for dispute resolution.