European Union : ESMA Chair keynote address at PRIME Finance Conference

PRIME Finance 6th Annual Conference

Keynote speech The Hague

Steven Maijoor Chair

European Securities and Markets Authority

Ladies and gentlemen,

Date: 23 January 2016 ESMA71-844457584-329

I would like to thank P.R.I.M.E. for inviting me to speak. It is a real pleasure to be here today with you and to have the opportunity to speak at this important conference.

I would like to talk to you today about two major regulatory reforms taking place in EU financial markets: the reform of the OTC derivatives markets and the reform of the way benchmarks are compiled and administered. I know that PRIME has a keen interest in these topics and these reforms form, of course, an integral part of ESMA's work, although the work for each is at a very different stage: while the OTC derivatives reforms are advanced, those impacting benchmarks are much more recent.

I will also touch upon the so-called third country policies in both of these EU reforms. As you will be aware, for EU bureaucrats countries outside the EU are called 'third countries'. As both OTC derivatives and benchmarks are or serve global markets, the third country policies are key elements of these reforms. And, of course, as we are all aware, recent political developments mean the third country policies of the EU are attracting more attention now than ever before, both in- and outside the EU.

But before I introduce these topics, let me say a few words on arbitration which is the core business of P.R.I.M.E. It might be surprising to hear, but arbitration is a topic P.R.I.M.E. and ESMA have in common. Both in the case of benchmarks and CCPs, ESMA has been designated as a non-voting member of supervisory colleges, and in both cases we have been

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granted by EU law a binding mediation role in certain circumstances. ESMA´s decision on a binding mediation prevails, legally, over the decisions of individual national regulators. Binding mediation has not been formally exercised so far by us in these areas but, interestingly, in some instances the possibility of ending up in a mediation procedure has probably fostered agreement between national regulators on some controversial matters within supervisory colleges. Additionally, I should mention that ESMA did complete its first binding mediation case in another area: last year ESMA applied binding meditation to a dispute concerning an investment fund between a home and host regulator.

Derivatives reform is for the most part complete and the focus has now turned to ensuring a consistent outcome

Let me now turn to giving you an insight to, and some of my reflections on, the changes in the OTC derivatives markets. These reforms were implemented mainly through the EU legislation known, for the sake of brevity, as 'EMIR'. EMIR followed the G20 commitment in 2009 to improve the OTC derivatives markets and aims at promoting transparency and standardisation in derivatives markets as well as reducing systemic risk through the application of its core requirements such as promoting central clearing and specifying risk management techniques.

I believe that EMIR is an example of successful financial reform in the EU for three main reasons:

• First, EMIR is in the legal form of a Regulation which means it applies directly in all Member States without national discretions or different transpositions. This is especially relevant in the area of OTC derivatives where small differences in requirements can affect where business is conducted;

• Secondly, a significant number of the more detailed rules, which underpin EMIR, were defined through what we call 'Technical Standards', drafted by ESMA. This approach allows technical experts to focus on preparing well-calibrated, detailed rules and again, I would stress the importance of details in OTC derivatives rules and getting them right, because they determine the costs of transactions and ultimately, where business is conducted. Equally like Regulations, Technical Standards are legal instruments which apply directly to each EU Member State but

  have the advantage that the process to amend them is quicker when we identify that something needs changing; and

• Thirdly, EMIR provides us with a gateway to strengthening supervisory convergence, that is consistency of supervision across the EU, a topic I will return to later in my speech.

  We cannot yet assess the full impact of EMIR given its relative newness and that some core elements, such as the classes of derivatives that are subject to the clearing obligation, are very recent, but I think it is the right time to take stock of what has been accomplished and what can still be improved. Of course, this is very much in line with the upcoming review of EMIR.

  As of today all EMIR-related Technical Standards have been finalised and the corresponding obligations have entered into force. In brief, the main ones include:

• Requirements for Trade Repositories (TR), which led to six TRs, collecting in total nearly 44 billion derivatives reports in 2016, being registered and under the direct supervision of ESMA;

• The reporting of all derivative trades to TRs. This reporting first started three years ago and the resulting TR data, which are critical for identifying the build-up of risks in the derivatives markets, are used by regulators for monitoring, supervision and policy purposes. For example, ESMA's Board has taken a number of decisions to centrally clear certain classes of OTC derivatives, all of which are based on the evidence of TR data;

• CCP Requirements, which led to 17 CCPs being authorised in the past three years and 22 third country CCPs being recognised. Many more third country CCPs are in the pipeline for recognition following new equivalence decisions by the European Commission;

• Central clearing of standardised OTC derivative contracts, also known as the clearing obligation, which mandates the interest rate swaps and CDS classes that account for the vast majority of the activity in OTC derivatives to be cleared; and

• Last but not least, margin requirements for OTC derivative contracts that are not centrally cleared entered into force earlier this month and will follow a gradual phase-in based on the internationally agreed implementation calendar.

Before I move on to the topic of supervisory consistency, let me make one more remark on these OTC derivatives reforms. As already stated, EMIR's purpose is to bring transparency

and stability to OTC derivatives markets. However, we should also recognise that with these reforms we have been able to establish a truly EU internal market for an activity that was, until recently, largely fragmented along national borders. At the risk of sounding like a true European bureaucrat, I dare to say that we have been able to lay the foundations of an 'EU derivatives union'.

So, now that this extensive set of rules has been finalised and entered into force, what comes next? Well, although some of the requirements are still in the process of being phased-in, ESMA's focus has moved from developing a single rulebook to ensuring supervisory convergence when implementing these rules. Indeed, having a consistent application of the requirements by CCPs and their national regulators within the EU is key to ensuring that the overall objectives of EMIR are met and that a level playing field exists for all market participants.

EU CCPs are a key priority for ESMA in terms of supervisory convergence work.

CCPs represent one of ESMA's priorities in terms of supervisory convergence. These market infrastructures have been given a starring role in the future management of systemic risks and financial stability. Therefore, it is imperative that they are supervised in a robust and coherent way across the EU. To illustrate what ESMA is doing here, let me mention in particular three activities that are central to our supervisory convergence work for CCPs: our annual stress test exercise of CCPs, our annual peer review of CCP supervisory practices and validations of changes to risk models and parameters, and our active coordination role across colleges, which has led to the development of guidelines, common processes, opinions and a number of Q&As.

Our first EU-wide CCPs stress test, conducted last year, gathered a lot of attention in the EU and beyond. We consider it a fundamental piece of work in the wider objective of ensuring a resilient CCP market place. Building on the experience gained from this first exercise, ESMA is currently running its second set of stress tests, through a renewed and thorough framework.

The second activity that has proved to be a very powerful tool in promoting supervisory convergence of CCPs is the annual peer review where we assess national regulators' supervisory practices. ESMA has conducted two to date and is initiating work for its third one. The peer review exercise has been valuable in both identifying best practices and areas of