EU market regulation: A rude wake-up call?

New rules in the European Union are forcing European banks in India to reconsider their clearing operations based out of India. In response to the financial crisis, the EU adopted the European Market Infrastructure Regulation (EMIR) in August 2012 to increase transparency in the “over-the-counter” (OTC) derivatives market and to mitigate systemic risk by reducing operational as well as counterparty credit risk. Once fully implemented, the EMIR will require certain classes of derivatives to be centrally cleared.

The EMIR also prescribes risk-mitigation techniques to be applied for uncleared OTC derivatives and aims to create reporting obligations for all derivative contracts.

International applicability

To ensure that European banks do not skirt around the EMIR through their foreign branches, the EU has sought to ensure that EMIR-related commitments applicable to EU members are implemented in a similar manner by the EU’s international partners. Article 25 of the EMIR requires central clearing parties (CCPs) in other global jurisdictions providing services to EU-registered banks to be approved by the European Securities and Markets Authority (ESMA). This approval depends on whether the ESMA determines the legal framework of a global jurisdiction to be the equivalent of the EU framework. For instance, the ESMA recognizes the clearing framework established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of the US as an equivalent framework.

Sawant Singh is a partner, Aditya Bhargava is a senior associate, and Raghuveer Sarathy is an associate at the Mumbai office of Phoenix Legal.