EMIR: frontloading requirement and updated ESMA Q&As

The European Securities and Markets Authority (ESMA) sent a letter to the European Commission on 8 May 2014 notifying the commission of issues that it has identified regarding the frontloading requirement under Regulation (EU) No 648/2012 on over-the-counter (OTC) derivatives, central counterparties and trade repositories (EMIR).

Under frontloading, users of OTC derivatives transactions may be required to clear transactions that are entered into after a central counterparty has been authorised to clear transactions of that class.

ESMA has identified that the frontloading requirement ‘may introduce significant uncertainties in the market with the consequences mainly borne by derivatives end users. These consequences are legal, operational and financial… and the overall effect could well be a reduction in the incentive to hedge risks during a certain period (to avoid the consequences of the frontloading effect), which would in turn increase the unhedged risks and would impact negatively on financial stability’…

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