Miscellaneous Over the counter derivatives: clearing and procedures for reporting
In 2009, the G20 committed to reform ‘over-the-counter’ (OTC) derivatives markets to improve their transparency and enable authorities to monitor systemic risks. This commitment was implemented in the EU through 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 (the ‘European Market Infrastructure Regulation’ or ‘EMIR’). Following the end of the Transition Period, EMIR forms part of retained EU law and therefore continues to apply in the UK, with the necessary changes made under the EUWA to ensure that it operates effectively following the end of the Transition Period.
	The Act makes two technical updates to EMIR as part of retained EU law to further improve the functioning of the UK’s regulatory regime for derivatives.
	The first update aims to enhance the accessibility of ‘clearing services’ for firms subject to the clearing obligation under EMIR. Some OTC derivatives (contracts agreed bilaterally between counterparties on tailor-made terms) must be "cleared" by central counterparties (CCPs), which are entities that reduce the risks arising from some trades by placing themselves between the buyers and sellers to the contracts traded on one or more financial markets. While EMIR imposes an obligation to clear certain trades, access to clearing can be problematic for certain firms, especially smaller ones.
	There are two main access routes to clearing: counterparties can become a ‘clearing member’ of a CCP or establish indirect clearing arrangements with a clearing member or a client of a clearing member. Given the costs linked to becoming a clearing member of a CCP, smaller counterparties with a limited volume of activity normally favour indirect clearing arrangements. However, such arrangements are difficult to access, are often complex, and their terms can vary widely, meaning there is little competition to improve prices and services. Barriers to accessing clearing may cause market participants to cease transacting derivatives or to engage in non-cleared OTC derivatives trading, thereby increasing risk in financial markets.
	The Act requires firms offering clearing services to do so in accordance with Fair, Reasonable, Non-Discriminatory and Transparent (FRANDT) terms. The FCA is delegated the power to make rules outlining the grounds on which commercial terms will be considered to satisfy FRANDT requirements. The implementation of FRANDT requirements will promote transparency and accessibility in the clearing of derivatives, making it easier for firms to fulfil their clearing obligations.
	The Act also requires an enhancement of the quality of data collected by Trade Repositories (TRs). TRs are financial market infrastructures which receive and store derivative transaction data from reporting counterparties in a continuously updated database and all derivatives trades must be reported to a TR. TRs’ data is primarily used by financial regulators to better monitor risks associated with derivative markets and it is important to safeguard data quality so that the FCA and the Bank of England are able to monitor risks to financial markets effectively.
	The Act requires TRs to put in place procedures to improve data quality and policies to ensure the orderly transfer of data between TRs, where necessary. The FCA is also delegated the power to adopt rules for this update to EMIR as retained EU law.