EUROPEAN COMMISSION Brussels, 23.11.2016 COM(2016) 857 final REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL under Article 85(1) of Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories.



1.INTRODUCTION Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR) was published in the Official Journal of the European Union (EU) on 27 July 2012, and entered into force on 16 August 2012. EMIR responded to the commitment by G20 leaders in September 2009 that: "All standardised OTC derivatives contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at latest. OTC derivatives contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements". Many derivatives regulators across the globe have also now transposed this commitment into their legislative frameworks. Prior to the financial crisis of 2007, regulators lacked information about activity in the derivatives markets; this meant that risks could remain unnoticed until they materialised. Moreover, counterparty credit risk between OTC derivative counterparties was often unmitigated, which could lead to losses materialising were one counterparty to default prior to fulfilling its obligations. Due to the high volumes of transactions across these markets and the interconnectedness of the markets' participants, such losses could pose a broader threat to the financial system. EMIR therefore seeks to promote transparency and standardisation in derivatives markets as well as reduce systemic risk through the application of its core requirements. These are: I. Central clearing of standardised OTC derivative contracts; II. Margin requirements for OTC derivative contracts that are not centrally cleared; III. Operational risk mitigation requirements for OTC derivative contracts that are not centrally cleared; IV. Reporting of all derivative contracts; V. Requirements for Central Counterparties (CCPs); VI. Requirements for Trade Repositories. In accordance with Article 85(1) of EMIR, the European Commission is required to review and prepare a general report on EMIR which shall be submitted to the European Parliament and the Council, together with any appropriate proposals. This review will take into account the need to support the European Commission's priority of promoting jobs and growth. 2.STAKEHOLDER INPUT EMIR applies to almost all users of derivatives, including any counterparties authorised under Union financial services frameworks, non-financial counterparties ('NFCs') established in the Union as well as CCPs and trade repositories. As a Regulation, it applies directly in all Member States of the Union. In order to gather stakeholder input for the purposes of the review, the Commission conducted a public consultation on the implementation of EMIR. This consultation took place between 19 May and 13 August 2015 with 172 responses received from a broad range of stakeholders across the EU, as well as third countries. Additionally, as part of the Call for Evidence consultation in the framework of the Capital Markets Union initiative which took place between 30 September 2015 and 31 January 2016, 278 respondents raised claims focused on provisions of EMIR. It was decided to wait for the input to this initiative in order to get a fair and balanced representation of the state of play of EMIR implementation and the challenges encountered, and serve as an appropriate basis for a review of EMIR. A detailed summary of the responses to the consultation on the implementation of EMIR is provided in the feedback statement. A number of reports have also been received from the European Securities and Markets Authority (ESMA) relating to various topics under EMIR, which the Commission has taken into account.

Finally, as part of the review, specific input was received from certain Union bodies and authorities in line with the Commission's mandate to review EMIR under Article 85(1): (a) Members of the ESCB (the European System of Central Banks) assessment of the need for any measure to facilitate the access of CCPs to central bank liquidity facilities: In its assessment the ESCB considers that, while competent authorities should continue to examine CCPs' liquidity risk management frameworks, no provisions for central bank liquidity access should be introduced in EMIR. The ESCB considers that this could undermine central bank independence, guaranteed in Article 130 of Treaty of the Functioning of the European Union, and create moral hazard on a large scale. The Commission agrees with the ESCB's assessment. (b) ESMA assessment of the systemic importance of the transactions of non-financial firms in OTC derivatives and, in particular, the impact of this Regulation on the use of OTC derivatives by non-financial firms: ESMA concludes that the current hedging approach is not capturing the most significant market players. ESMA suggests removing the hedging exemption and considering the introduction of only a simple threshold to capture the largest market players in terms of volumes. On the basis of ESMA’s input, the Commission agrees that for some NFCs the application of the current approach under EMIR could be too overly burdensome considering that it may not reliably reduce systemic risk. The nature of hedging activity is nonetheless a relevant factor when considering the systemic relevance of NFCs because hedging entities are generally not highly leveraged and hold underlying offsetting positions to their OTC derivative contracts. (c) ESMA review of the functioning of the supervisory framework for CCPs, including the effectiveness of supervisory colleges, the respective voting modalities laid down in Article 19(3), and the role of ESMA, in particular during the authorisation process for CCPs: ESMA identifies some cases where common approaches should be developed, in particular to the application of the processes envisaged in Article 15 and 49 of EMIR. The feedback from the consultation showed that there was a great interest for clarifying the application of these articles. Supervisory convergence as well as publicly available criteria for the application of these articles will be considered further by European authorities. (d) ESMA and ESRB reports on the efficiency of margining requirements to limit procyclicality and the need to define additional intervention capacity in this area: Both authorities made suggestions for improving the treatment of procyclicality. The Commission agrees with the suggestion to increase the transparency of margin requirements, as this is information that clearing members need for effectively managing their exposures and predicting sudden margin changes, but other changes would be premature taking account of the recent application of existing margin and anti-procyclicality requirements and the lack of crystallised failure in margin standards since then. (e) ESMA report on the evolution of CCP’s policies on collateral margining and securing requirements and their adaptation to the specific activities and risk profiles of their users: ESMA concludes that there is, at this stage, no need for a review of the EMIR provisions on collateral margining and securing requirements as the Delegated Regulation n°153/2013 provides sufficient granularity for these requirements. The input from the diverse authorities shows that EMIR's implementation is achieving its original objectives to promote transparency and standardisation in derivatives markets as well as reduce systemic risk. This input has been duly taken into consideration when drafting this report. However, the Commission notes that in some areas the introduction of significant changes to EMIR would be premature taking account of the recent application of existing requirements and the absence of failure in the application of the relevant standards to date. 3.PURPOSE OF THE REPORT The Commission is required under 85(1) to produce a report. It is important to note that certain core requirements provided for under EMIR have yet to be implemented or completed. In particular, at this stage clearing obligations and margin requirements in respect of non-cleared OTC derivatives transactions are not yet fully applicable. In this sense, it is not possible at this stage to review the impact of EMIR comprehensively. Nevertheless, stakeholders have identified a number of issues relating to the implementation of those requirements which already apply (namely, reporting to trade repositories and operational risk mitigation requirements), as well as issues encountered in preparing for the clearing and margin requirements. In particular, many stakeholders argue that certain derivatives market participants are facing significant challenges in implementing the requirements such as the reporting and the clearing of some transactions, to an extent that may be considered disproportionate to the objectives of EMIR and which, in some cases, could have an excessive impact on businesses as these requirements would be costly to fulfil compared to the advantages they bring in terms of market transparency and financial stability. Many respondents to the public consultation illustrated their responses by making a comparison to the approaches to regulatory reform that have been taken in other jurisdictions. This report provides a summary of the areas where consultation responses and specific input received from various authorities have shown that action is necessary to ensure fulfilment of the objectives of EMIR in a more proportionate, efficient and effective manner. 4.PRINCIPAL ISSUES IDENTIFIED There is general support for the objectives of EMIR of promoting transparency and standardisation in derivatives markets and reducing systemic risk through its core requirements. These core requirements –clearing, margin requirements, reporting, operational risk mitigation requirements and requirements for trade repositories and CCPs – remain integral to achieving the objectives of EMIR, and delivering on its international commitments for regulatory reform. It is therefore considered that no fundamental change should be made to the nature of the core requirements of EMIR, which are integral to ensuring transparency and mitigating systemic risks in the derivatives markets. Nonetheless, a number of areas were highlighted where the EMIR requirements could be adjusted without compromising on its overall objectives in order to: (i) simplify and increase the efficiency of the requirements; and (ii) reduce disproportionate costs and burdens.

4.1. Simplifying and increasing the efficiency of the requirements Respondents, including CCPs, clearing members, non-financial counterparties, small financials and pension funds, highlighted a number of requirements which could be refined to ensure the smooth functioning of derivatives markets or enable a smoother implementation of the requirements by market participants, without compromising on the objectives of EMIR or introducing additional regulatory burdens. 4.1.1. Introducing a mechanism to suspend the clearing obligation Both ESMA and the ESRB highlighted the absence of a mechanism under EMIR for the clearing obligation to be suspended promptly, suggesting that this may be necessary to react quickly to dramatic changes in market conditions (e.g. sharp change in volumes cleared or liquidity) and remove or suspend swiftly a clearing obligation where the market situation so requires. Several other respondents also supported the introduction of such a mechanism. Clearing obligations can be amended or removed through Regulatory Technical Standards ('RTS') but this process can take several months. Furthermore, there are circumstances which could be envisaged where an expedited process to suspend a clearing obligation may be necessary to avoid market disruption. The Commission will therefore propose a mechanism for suspending a clearing obligation as part of the proposal on the CCP Recovery and Resolution for the purposes of resolution and consider the possibility to broaden the scope of the suspension of a clearing obligation for other appropriate purposes. 4.1.2. Facilitating the predictability of margin requirements. Many respondents, notably industry associations and banks noted that, currently, it can be difficult to predict the levels of margin that they will be required to post to CCPs for centrally cleared transactions. These respondents suggested that better information sharing by CCPs to clearing members could address this shortcoming. Both ESMA and the ESRB in their reports on procyclicality and margining requirements also called for greater transparency on margin standards and procyclicality requirements. Better information sharing could make compliance with margin requirements more efficient for market participants and enable them to better manage their own assets. Similarly, with respect to non-cleared transactions, some respondents, notably financial institutions, noted the absence of a clear mandate for initial margin models to be endorsed by authorities, which could lead to uncertainty among market participants as to whether their calculations are considered by authorities to be fully compliant with regulations. A mandate for initial margin models to be endorsed by authorities could promote certainty for market participants and authorities alike. 4.1.3. Streamlining Trade Reporting The topic of reporting to trade repositories attracted a significant number of responses from market participants and authorities. Respondents, primarily industry associations and companies, but also public authorities, consultancies, NGOs, and a trade union, suggested that, currently, many reports by the two counterparties pertaining to the same transaction are not accurately matched within trade repositories. This is attributed in part to a lack of clarity around what needs to be reported and how, and to differences in requirements between trade repositories. Further, respondents suggested that requirements could be simplified significantly without losing crucial data, in particular with respect to exchange traded derivatives. Respondents also questioned whether, as a result of the difficultly in submitting accurate data and matching, the data was as reliable and usable as it should be. Finally, respondents questioned the utility of the requirement to report transactions existing prior to the start of the application of the reporting obligation (so called 'backloading') as this data is very challenging to report - it covers derivatives that were concluded before counterparties were in a position to know what information had to be kept and reported - and it is considered as less and less useful as it concerns historical data that is not of critical importance for regulators. Many respondents noted improvements that could be made at the level of trade repositories to make data aggregation more efficient, notably through the use of common methodologies by Union trade repositories. Further, ESMA suggested that fines for trade repositories may need to be increased in order to ensure effective supervision. Promoting transparency by streamlining reporting requirements in certain areas and enhancing the functioning of trade repositories is essential to fully achieve the objectives of EMIR. Thus, it is considered that further assessment of the current rules should be undertaken to take specific actions to achieve that goal. This can also help reduce the compliance burden for market participants. Further, certain third country authorities face legal challenges in executing the arrangements (i.e. conclusion of an international agreement) currently required under EMIR for mutual access to data held in trade repositories. Alternative methods for providing access to third country authorities of trade repositories' data that provide appropriate safeguards should therefore be explored. 4.2 Reducing disproportionate costs and burdens 4.2.1. Scope of transactions Responses pointed to a number of areas where the scope of transactions covered by requirements could be considered unnecessary in achieving the objectives of EMIR. In particular, it was questioned whether the requirement to clear contracts entered into before the clearing obligation enters into force (so called 'frontloading') is proportionate given the limited number of contracts that this will capture as it is a temporary measure by nature, balanced against the difficulties and uncertainty of applying clearing obligations retrospectively. Companies and industry associations questioned whether it is proportionate to apply operational risk mitigation requirements to intragroup transactions, given that these transactions are undertaken within the same corporate groups where coordination between the counterparties is inherent in the nature of the transactions. It is appropriate to review to what extent transactions entered into before the clearing obligation enters into force and intragroup transactions should remain in scope of the relevant requirements. 4.2.2. Scope of entities a) Non-Financial Counterparties (NFCs)