Impacts of EMIR for the Buy Side: The Greater Good, But a Greater Cost

by Joséphine de Chazournes, April 2, 2013
Regulation
EMEA

Abstract

Celent estimates that 90% of the buy side believes that aggressive regulatory changes and uncertainties are putting the most pressure on their businesses in 2013. Not surprisingly, EMIR, Dodd-Frank, and Basel III are expected to exert the largest influence on the economics of derivatives trading in the next two years.

The buy side is a clear supporter of the European Market Infrastructure Regulation (EMIR) because it decreases systemic risk exposure that end clients do not want to face again. In the report Impacts of EMIR for the Buy Side: The Greater Good, But a Greater Cost, Celent looks at the impact of EMIR on buy side players.

In December 2012, the European Securities and Markets Authority (ESMA) forecast that market participants are unlikely to face mandatory clearing of over-the-counter (OTC) derivatives in Europe before the middle of 2014, around 18 months later than intended, obviously pushing back structural reforms.

The new regulation requires entities that trade any derivatives contract, including interest rates, foreign exchange, equity, credit, and commodity derivatives, to:

  • Report every derivative contract that they enter to a trade repository.
  • Implement new risk management standards, including operational processes and margining, for all uncleared OTC derivatives.

It is clear that the impact of this regulation will be dramatic, in terms of creating economic uncertainty in the market infrastructure and potentially disintermediating liquidity.

“Only 30% of buy side players are fully operational in terms of implementation efforts for OTC clearing and collateralization," says Joséphine de Chazournes, Senior Analyst with Celent’s Securities & Investments Group and author of the report, “However, the implementation of EMIR is going to happen gradually.”

In this report, Celent explains the regulatory framework of EMIR, and the parallels with the Dodd-Frank Act. It then looks EMIR’s impact and considers the questions the buy side faces.

This 26-page report contains five figures and five tables.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

1

Introduction

2

Regulatory Framework

4

 

EMIR Requirements

4

 

Clearing

7

 

Dodd-Frank

9

Impact for the Buy Side

12

 

Exemptions from EMIR

13

 

Reporting

13

 

Clearing

18

 

Collateral

19

Outstanding Questions

20

 

Regulatory Puzzle

20

 

Overall Costs

20

 

Trade Repository and Consolidated Tape

20

 

Catalogue of Products Traded

20

 

Open-Access Requirement

22

 

Direct Clearing

22

 

Market Consolidation

22

 

The Devil in the Detail

23

Conclusion

24

Leveraging Celent’s Expertise

25

 

Support for Financial Institutions

25

 

Support for Vendors

25

Related Celent Research

26

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