EMIR, MiFID and MiFIR Factors for Collateral Management Services Consideration

The collateral management services business is contending with a number of regulations. In addition to new rules from the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commission (IOSCO) requiring collateral and collateral management for non-centrally cleared over the counter (OTC) derivatives, the European Market Infrastructure Regulation (EMIR) and Markets in Financial Instruments Directive (MiFID) II along with the Markets in Financial Instruments Regulation (MiFIR) are also having affects.

The European Market Infrastructure Regulation (EMIR)

Markets are increasingly focusing on derivatives and EMIR as another piece of legislation that adds new rules for non-centrally cleared OTC derivatives. The main focus of the regulation is on all types of OTC derivatives traded in Europe. The legislation was originally introduced by the European Union and seeks to increase transparency in OTC derivatives trading. It focuses on rules for central counterparties, trade repositories, reporting and clearing.

Similar to the BCBS and IOSCO’s new rules for non-centrally cleared OTC derivatives it also includes requirements for collateral in these types of transactions. As non-centrally cleared OTC derivatives are required to conform with current market standards, they will add expanding collateral management service needs for the industry.

MiFID II and MiFIR Implications for Collateral Management Services

MiFID was initially introduced in 2004 and is known for enacting harmonized legislation for investment services across the European Economic Area. In April 2014, the European Parliament approved MiFID II, an updated version of MiFID, along with MiFIR. These legislations strengthen the harmonization of rules for investment servicing firms across Europe. The rules cover a full range of services that directly and indirectly affect collateral management services through collateral requirements, standardized reporting requirements and cross border passporting. Servicing guidelines include legislations for home state and passporting, counterparties, pre-trade transparency, post trade transparency, securities finance transactions and more.

The rules also support cross border collateral transactions and collateral management. The rules are expected to bring about an increased focus on collateral requirements for small institutions which is expected to be burdensome in terms of costs. Undertakings for collective investment in transferable securities (UCITS) funds are also one product expected to be significantly affected. These funds are actively engaged in securities lending and also utilize derivatives. MiFID II includes provisions for both investment strategies which rely heavily on collateral management services for investment management.

Both MiFID II and MiFIR are scheduled to go into effect in January 2018. However, the Financial Conduct Authority has reported that the integration of the new legislation will take place gradually with January 2018 reported as a soft rollout. Firms engaging in activities involving MiFID II regulations specifically are required to become authorized with the deadline for priority application considerations in July 2017. Once integrated the MiFID II framework specifically is expected to significantly increase the ability of European government authorities to capture data across the entire European Economic Area which is expected to be greatly beneficial for broad ranging harmonization.

The Evolution of Collateral Management Services

Collateral management services are relied upon across the financial services industry. They support efficient use of inventory and help manage risk. In the broadly changing investment services marketplace, regulations from the BCBS and IOSCO as well as new rules from EMIR, MiFID II and MiFIR are expected to unify the European markets – creating more efficient transactions for all market participants including banks and broker-dealers, buy-side firms, asset managers, pension funds, insurance companies, corporates and central banks. These new regulations also cover a broad range of activities both directly and indirectly affecting collateral management services with specific implications for securities finance collateral and OTC derivatives collateral. While these regulations become integrated, industry speculators believe individual countries will take to the regulations at varying levels however the ultimate integration will create a greater market infrastructure for collateral management and increased liquidity. Additionally, the new directives are expected to influence new collateral systems and technology being developed and utilized across Europe.

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