This letter to the European Commission advances ESMA's intention to ease certain frontloading requirement under the European Markets Infrastructure Regulation (EMIR).  Frontloading is a term that refers to the clearing obligation under EMIR, which will oblige counterparties to centrally clear certain derivative trades through clearing houses (CCP). ESMA believes that the frontloading procedure creates uncertainties for derivatives end-users while the exact terms of the clearing obligation has not been defined which could have adverse impacts on risk hedging and financial stability. Therefore, ESMA informs the European Commission that it intends to establish the frontloading requirement in a manner that will minimise uncertainty. The clearing requirement began to apply with the first authorisation of an EU-based CCP which happened on 18 March 2014. Following the first CCP approval, EMIR requires ESMA to draft within six months technical standards which will define the derivatives classes subject to central clearing.  However, compulsory central clearing will only start with the entry-into-force of the technical standards which creates the need to ‘frontload’ those derivate trades since 18 March 2014.

Legal Basis According to Article 5(2) 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 (EMIR), the European Securities and Markets Authority (ESMA) shall develop draft regulatory technical standards specifying the class of OTC derivatives that should be subject to the clearing obligation, the date or dates from which the clearing obligation takes effect, including any phase in and the categories of counterparties to which the obligation applies, and the minimum remaining maturity of the OTC derivative contracts referred to in Article 4(1)(b)(ii) of EMIR. Background and Procedure On 1 October 2014, ESMA submitted a draft regulatory technical standard (RTS) on the clearing obligation to the European Commission pursuant to Article 10(1) of Regulation No (EU) 1095/2010 (the ESMA Regulation) and Article 5(2) of EMIR. This draft RTS covered Interest Rate Swaps. On 18 December 2014, the Commission informed ESMA of its intention to endorse with amendments this draft RTS and submitted to ESMA a modified version of the RTS (the “modified RTS”) introducing, among others, (1) amendments to the date on which the frontloading obligation starts to apply and (2) a new provision on the treatment of non-EU intragroup transactions. Pursuant to Article 10(1) of the ESMA Regulation, this notification from the Commission opens a period of six weeks during which ESMA may amend its draft RTS on the clearing obligation on the basis of the Commission’s proposed amendments and resubmit it to the Commission in the form of a formal opinion. ESMA has to send a copy of its formal opinion to the European Parliament and to the Council. In accordance with Article 44(1) of the ESMA Regulation the Board of Supervisors has to adopt a formal opinion. Executive Summary ESMA agrees with the ultimate objectives of the modifications that the European Commission intends to introduce. However, ESMA considers that the tool proposed by the Commission for the matter related to the non-EU intra group transactions is not appropriate from a legal perspective and, in the case that the Commission intention is to define a later application date for those transactions, ESMA stands ready to explore, in coordination with the Commission, a different manner to incorporate that provision. ESMA backs the modifications on the frontloading section, though has a few observations and improvements with respect to several recitals. ESMA proposes to incorporate the suggestion of the Commission to deal with the application of the 8 billion threshold to investment funds for the definitions of types of counterparties as a specific provision in the text of the RTS.

Decision to adopt a supervisory measure taking the form of a public notice and to impose a fine in accordance with Statement of Findings in accordance with Articles 64(5), 65, 67 and 73 of Regulation (EC) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories

Public notice regarding negligent breach by DTCC Derivatives Repository Ltd of its legal obligation to ensure immediate access for regulators to data reported under EMIR

DTCC Derivatives Repository Ltd (‘DDRL’) is a trade repository registered in the European Union and is part of the DTCC group which includes a number of companies providing post-trading services to the global financial services industry. DDRL was registered by ESMA as a trade repository under Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (‘EMIR’) on 7 November 2013. ESMA has responsibilities for the supervision and enforcement of provisions under EMIR concerning DDRL and other trade repositories registered in the EU.

In May 2014, ESMA’s supervisory team became aware of delays in providing regulators with access to data reported to DDRL under EMIR. Following further examination, the supervisory team formed the view that there were serious indications of the possible existence of facts liable to constitute one or more of the infringements listed in EMIR. The matter was accordingly referred to an independent investigation officer (the ‘IIO’). The IIO considered the evidence referred to him and conducted further investigations, before submitting his findings to ESMA’s Board of Supervisors (the ‘ESMA Board’).

Based on the findings of the IIO and the evidence put before it, the ESMA Board found on 23 March 2016 that an examination of the facts showed that DDRL had committed the following infringement under EMIR and had done so negligently. DDRL committed an  infringement of EMIR by not allowing regulators and supervisors direct and immediate access to the details of derivatives contracts they need to fulfil their responsibilities and mandates.

On February 27, the European Commission extended for four months the deadline for ESMA advise on the equivalence between non-EU legal and supervisory frameworks and EMIR, the European Markets Infrastructure Regulation.  According to the letter from the Commission, ESMA shall now deliver its advice on Japan and the USA by 15 June 2013 and, for the remaining countries specified in the request by 15 July 2013.  The original deadline was 15 March 2013.