European Market Infrastructure Regulation

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European Markets Infrastructure Regulation (EU Regulation 648/2012 (EUR Lex)), better known as “EMIR” is the result of a final proposal published by the European Commission on 15 September 2010, to increase stability within OTC derivative markets.

What EMIR does

The Regulation introduces:

• Reporting: a reporting obligation for OTC derivatives;
• Mandatory Clearing: a clearing obligation for eligible OTC derivatives;
• Uncleared derivatives margin: measures to reduce counterparty credit risk and operational risk for bilaterally cleared OTC derivatives;
• CCP rules: common rules for central counterparties (CCPs) and for trade repositories; and
• Interoperability rules: rules on the establishment of interoperability between CCPs.

Mandatory clearing

The EU Regulation follows, and facilitates within the EU, the commitment made by G20 leaders in Pittsburgh, September 2009, that:

“All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by the end 2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements. We ask the FSB and its relevant members to assess regularly implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.”

On a global level, work is being undertaken by CPSS and IOSCO (the Committee on Payment and Settlement Systems and International Organisation for Securities Commissions) to update and strengthen the existing standards for CCPs, CSDs, payments systems, collectively referred to as Financial Market Infrastructures (“FMI’s”) together with the treatment of trade repositories. To date the work of the group has been progressing well, where the revised Principles were published last year for public consultation and it is anticipated that they will be finalized later this year.

Trade reporting

There is trade reporting and transaction reporting and we won’t think any less of you if you get these confused — as long as you don’t of us — and both of them are mandated by MiFID. Article 9(1) of EMIR also requires all counterparties and CCPs to report the details of derivative contracts they conclude (and modifications and terminations of those contracts) to trade repositories.

EMIR refit

At some stage the European Commission was persuaded it might have over-reached on certain aspects, and accordingly rowed back in the so-called EMIR refit. This created yet more work for the contractor-minions of old London town.

Hedging Exemption3.  In calculating the positions referred to in paragraph 1, the non-financial counterparty shall include all the OTC derivative contracts entered into by the non-financial counterparty or by other non-financial entities within the group to which the non-financial counterparty belongs, which are not objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of the non-financial counterparty or of that group.

Hedging exemption

Article 10.3 provides:

3. In calculating the positions referred to in paragraph 1, the non-financial counterparty shall include all the OTC derivative contracts entered into by the non-financial counterparty or by other non-financial entities within the group to which the non-financial counterparty belongs, which are not objectively measurable as reducing risks directly relating to the commercial activity or treasury financing activity of the non-financial counterparty or of that group.

See also

• EMIR refit
• Clearing thresholds - EMIR
• Portfolio reconciliation and dispute resolution - EMIR
• Financial counterparty
• Non-financial counterparty