European Market Infrastructure Regulation

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. 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.

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 end 2012 at the latest. OTC derivative contracts should be reported to trade repositories. Noncentrally 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.

CPSS-IOSCO and the Basel Committee of Banking Supervisors (BCBS) have also been undertaking joint work to develop an appropriate methodology for developing a capital treatment for banks’ exposures to CCPs.

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