EMIR technical standards enter into force

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17 Mar, 2013

The European Market Infrastructure Regulation (EMIR) was passed in 2012, but most provisions only apply after technical standards enter into force. Technical standards on OTC derivatives, reporting to trade repositories and requirements for trade repositories and central counterparties entered into force on 15 March 2013. EMIR gave rise to the IASB's project on the novation of derivatives as EMIR brings about hedge accounting questions.

EMIR implements a central clearing for certain classes of OTC derivatives and requires the novation of the derivatives in question to these central counterparties (CCP). The IASB's project on the novation of derivatives is dedicated to the question whether the novation of OTC derivatives in these circumstances would result in the discontinuing of hedge accounting.

On 28 February 2013, the IASB issued ED/2013/2 Novation of Derivatives and Continuation of Hedge Accounting. The exposure draft proposes changes to IAS 39 and the forthcoming hedge accounting chapter of IFRS 9 to permit the continuation of hedge accounting where hedging instruments are novated to a central counterparty as a result of laws or regulations around OTC derivatives. ED/2013/2 proposes that the novation of a hedging instrument should not be considered an expiration or termination giving rise to the prospective discontinuation of hedge accounting if all of the following (summarised) criteria are met:

  • the novation is required by laws or regulations
  • the novation results in a central counterparty becoming the new counterparty to each of the parties to the novated derivative
  • the changes in terms of the novated derivative are limited to those necessary to effect the terms of the novated derivative.

The ED currently only applies to novations that occurred as a result of laws and regulations. It does not apply to instruments novated voluntarily as a pre-emptive measure in expectation of corresponding laws and regulations.

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