The European Property Federation's responses to questions posed by Werner Langen MEP, European Parliament Rapporteur, in relation to the European Commission's legislative proposal on OTC derivatives follow below.
The European Property Federation represents all aspects of property ownership and investment: residential landlords, housing companies, commercial property investment and development companies, shopping centers and the property interests of the institutional investors (banks, insurance companies, pension funds). Members own property assets valued at 1.1 trillion, providing and managing buildings for the residential or service and industry tenants that occupy them.
We are grateful for the opportunity to contribute to the process of legislative scrutiny and development of this important piece of legislation. We have only provided responses to certain of the questions you raised.
The key problems that we believe have to be addressed are as follows:
Specific and precise modifications and clarifications are needed if the AIFM Directive is used to set the distinction between financial and non-financial businesses, because its own scope was determined by considerations that are different from those applicable to EMIR and it remains unclear even today. In particular, it should be made clear that:
o the business of real estate development and investment is intrinsically non-financial. Real estate businesses create places, build and look after buildings and sell accommodation to the occupier market their core business is to invest in land, buildings and places, not financial instruments. This is particularly important if there is no exemption for pre-existing contracts like interest rate hedges, as very serious property and debt market instability could result if margin must be posted for such contracts (the estimated potential cash requirement today is more than 60 billion across Europe).
o non-financial businesses (including real estate) must not be treated as financial simply by virtue of the fact that they are owned by a fund whose manager is regulated under the AIFM Directive. That would produce arbitrary and undesirable consequences, with the treatment of a business's commercial hedging derivatives depending not on the nature of the business, but rather on the way in which the business happens to be owned from time to time.
Where real estate businesses are treated as non-financial, risk mitigation requirements should recognize collateral provided in the form of security over underlying real estate. There should generally be no need for cash collateral or more capital and the imposition of such requirements could itself destabilize the sector.
A clear and coherent approach to territorial scope is needed. Territorial limitations should relate to EMIR's overall scope; they should not determine whether a business is treated as financial or non-financial.
Exposing the property sector to the risks described above by imposing margining requirements would indirectly affect the financial system as well, with a danger of damaging market stability and increasing systemic risk because of the substantial exposure that many European financial institutions have to real estate.
1. Is it necessary to modify Article 1 on subject matter and scope? Do you see the need for further exemptions and if yes, why?
Yes, it is necessary to modify the provisions on scope. EMIR fails clearly and precisely to define its territorial scope. The only territorial constraint in EMIR is the definition of "non-financial counterparties" as undertakings "established in the Union". It is not clear whether/why the place of establishment of an entity should be a decisive factor, either for whether it is treated as "financial" or "non-financial", or for whether its derivative contracts are within the scope of EMIR in the first place.
In the real estate industry, the financing of property investment commonly includes floating rate debt and an associated interest rate swap providing a versatile and