The European market infrastructure regulation (EMIR)
WHAT IS THE EUROPEAN MARKET INFRASTRUCTURE REGULATION
The European Market Infrastructure Regulation (EMIR), adopted across the EU in 2012, was constructed to vastly increase the level of transparency, and therefore reduce the systemic counterparty and operational risk in the over-the-counter (OTC) derivatives market, which is cited as one of the major causes of the 2008 financial crisis.
This wide-reaching regulation imposes requirements on all entities that enter into, modify or terminate any derivative transaction (exchange-traded or OTC). This extends to entities not involved in Financial Services.
The first and most poignant is the directive for all entities to report their derivative transactions on a T+1 basis to their corresponding trade repository. The reports include 26 fields of counterparty data, and 59 fields of additional data. Reporting can be undertaken by third parties on a firm’s behalf, which can help companies meet their obligations, but with a small number of solutions in the market, some firms are struggling to adhere to.
Clarifications to the regulation continued to be provided by ESMA through 2020, clarifying even the firms who have achieved compliance need to ensure they are consistent with the new guidance. EMIR also provides new requirements for the risk management of derivatives trading and clearing, mandating clearing of specific OTC derivative transactions through Central Counterparties. These rules apply to any firms that meet specific thresholds within each asset class.
These thresholds, and other exemptions, were reiterated in the ‘EMIR Refit’, implemented in 2019. However, even if firms are currently under the regulatory threshold for certain requirements, they must monitor and inform regulators if they approach or pass this. While this generally reduced the regulatory burden on small financial and non-financial firms, other firms have had to take on additional responsibilities and are now obligated to report trades on behalf of their non-financial counterparties.
European legislations periodically undergo the European Commission’s regulatory fitness and performance programme, and reviewed for potential enhancements and improvements. This process was concluded for the EU’s EMIR regime in 2019, with changes implemented in July the same year to address compliance costs, transparency issues and insufficient access to clearing for certain counterparties.
This is referred to as EMIR Refit and provided a range of updates to the existing regime to streamline the reporting obligations, improve the quality of the data being reported, make supervision more effective, whilst increasing access to clearing by removing unnecessary obstacles.
Specific changes include those for “small financial counterparties” who became exempt from the obligation to clear their transactions through a CCP, while remaining subject to risk mitigation obligations. Smaller non-financial counterparties (NFCs) also saw reduced clearing and reporting obligations.
- Amendments to the definition of financial counterparties (FC) in relation to investment funds and central securities depositories
- Introduction of a new category of “small financial counterparty”
- Amendments in part to the threshold calculation and clearing requirements for NFCs
- Amendments to the mandatory clearing timings of specific derivative for certain entities
- Amendments to the reporting obligation in respect of historic derivative transactions and intra-group transactions
- Clarification of who should be subject to the reporting obligation in certain scenarios
- Reduction of the reporting burden for NFCs which fall below the clearing threshold