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OTC Derivative Market Regulation: Challenges for Corporates

by Sven Walterscheidt, Senior Manager, Corporate Treasury Solutions, PwC (Germany) and Erwin Bastianen, Senior Consultant, Corporate Treasury Solutions, PwC (the Netherlands)

When the credit crisis was evaluated during the G20-summit in Pittsburgh in September 2009, the over-the-counter (OTC) derivative market was flagged as one of the main causes. For this reason, the Dodd-Frank Act (DFA) in the United States and the European Market Infrastructure Regulation (EMIR) in the European Union were developed. Although the regulations were mainly focused on the systemic risks caused by financial parties, non-financial parties are also impacted. The new OTC derivatives regulation will change the handling of derivatives fundamentally and will pose new challenges for treasury departments. With the publication of an important part of the technical standards on February 23 2013, EMIR started to have its first implications on treasury operations on March 15 2013.

Scope and objectives

EMIR is already in force
The regulation EMIR came into force on August 16 2012, while an important part of the technical standards has come into force on March 15 2013. The reduction of counterparty risk, the reduction of operational risk and the increase of transparency in the OTC derivative market are the three main objectives pursued by EMIR.

EMIR poses challenges on every organisational level.

EMIR makes a clear distinction between financial and non-financial counterparties. Financial counterparties do not only include banks and insurance companies, but also for example investment firms authorised in accordance with the Markets in Financial Instruments Directive (MiFID). EMIR is applicable to all OTC derivative transactions in which at least one of the counterparties is established in the European Union. In the case that an OTC derivative is concluded between an entity in Luxembourg and an entity in New York, the derivative is subject to both the European regulation (EMIR) and the American regulation (DFA). For such derivatives, the recognition of third-country institutions could be a solution.