Prepare for EMIR now

LegalOperational RiskPrime BrokerageRegulation
26 Jun, 2012

FSA urges buy-side firms to prepare for EMIR now irrespective of rules being finalised
The UK Financial Services Authority (FSA) has urged buy side firms trading swaps to prepare for mandatory clearing irrespective of what the finalised EMIR rules will look like and warned them not to become too dependent on their clearing brokers.

“Non clearing members should not wait until the rules are finalised but should start preparing now for mandatory clearing. Firms need to comply by next year and waiting for complete certainty about what the final rules surrounding clearing will look like is not an option,” said David Lawton, acting director of markets at the FSA, speaking at the International Derivatives Expo in London.

Implementation deadlines have frustrated buy-side operations teams. EMIR is yet to become law which is proving problematic for buy-side firms desperate to find a clearing broker and negotiate intricately detailed clearing agreements.

However, Lawton warned that too many buy-side firms were overly reliant on their clearing brokers. “A lot of buy-side firms seem to lack a strategy and are over reliant on their clearing brokers. I suspect some clearing brokers are promoting solutions which are not necessarily in their clients’ best interests,” said Lawton.

Acquiring a clearing broker is a time consuming task, as several operations executives outlined at a panel discussion on mandatory clearing held by COOConnect earlier in the year. Jaki Walsh, group derivatives operational officer at F&C Asset Management, said it had taken seven months for a clearing broker to onboard just one fund. Furthermore, there are only 15 clearing brokers vying for business, which has led some to speculate smaller funds could struggle to find a clearing broker in good time.

Lawton acknowledged the timetable was challenging, but added “EMIR impacts everyone trading derivatives from the biggest investment banks to the smallest investment funds. Despite the uncertainty, financial institutions need to prepare, and the onus is on them to ensure compliance. It is essential to start preparations now so as not to make mistakes as the deadline nears.”

He also said the FSA was working closely with industry to ensure the latter would be ready for the new rules. “The FSA has been supporting industry’s preparations (for mandatory clearing) and we are holding workshops and providing a lot of information and guidance to market participants. However, the authorities can only do so much, and the industry will ultimately have to take responsibility for ensuring compliance,” he highlighted.

ESMA has just published a 293 page consultation paper on the technical standards for regulating the OTC derivatives market, as well as information on CCPs and trade repositories. However, there appears to be very little information about how much the changes will cost. The public consultation period will finish in August with the final draft due to be endorsed by the European Commission at the end of September. Lawson said financial institutions should review the consultation paper.