EMIR is intended to reduce system risks in the European derivatives market. EMIR not only affects banks and other financial institutions, but for the first time companies in the real economy are also directly affected by regulation of the financial market. All companies that trade in derivatives will have to intensively address issues that arise from supervision by the Financial Market Authority.
What is EMIR?
As a result of the experiences of the 2008 financial market crisis, the heads of state and government of the leading industrial nationals decided at the G20 summit in Pittsburgh in 2009, to make over-the-counter (OTC) derivatives trading more transparent and safer. In particular the G20 decided that standardised OTC derivatives would be settled by central counterparties, and that OTC derivatives would be required to be reported to trade repositories.
This decision was final implemented on 16 August 2012 with the entry into effect of Regulation (EU) No 648/2012 of the European Parliament and the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (European Market Infrastructure Regulation, EMIR). The specific specifications arising from this regulation appeared in the form of technical standards, which have been applicable since 15 March 2013.
Who is affected?
The EU Regulation contains requirements for all counterparties to derivative transactions. The Regulation differentiates, however, between financial counterparties and non-financial counterparties. Pursuant to Article 2 (8) EMIR financial counterparties are: investment firms, credit institutions, (re)insurance undertakings, UCITSs and their management companies, institutions for occupational retirement provision and alternative investment funds managed by authorised or registered AIFMs.
All other undertakings registered in the EU are considered as non-financial counterparties pursuant to Article 2 (9) EMIR.
What are the key themes of the Regulation?
For standardised OTC derivatives a clearing obligation has been introduced. The clearing obligation applies to all financial counterparties. Non-financial counterparties are only subject to the clearing obligation, if they trade in derivatives to a larger extent, and therefore exceed specific clearing thresholds.
The clearing thresholds have been set as follows:
- EUR 1 billion gross nominal value for OTC credit and share-based derivatives
- EUR 3 billion for OTC commodity-based derivatives and all other OCT derivatives.
The clearing obligation was initially introduced for certain OTC interest rate derivatives denominated in Euro, Sterling, US Dollars and Japanese Yen. The relevant technical standard was published in the Official Journal of the European Union on 01.12.2015 and has been applicable for existing clearing members since 21.06.2016. A gradual introduction is intended for remaining market participants until 2018. The relevant Technical Standard can be found here. Other technical standards, which explain the clearing obligation for specific OTC derivatives, are being drawn up by ESMA, and are published in the Official Journal of the European Union.
For OTC derivative transactions that are not settled via a centralised counterparty particular Risk Management Requirements (risk-mitigation techniques pursuant to Article 11 EMIR) apply.
These include the timely confirmation of contracts, reconciling of portfolios, compressing of portfolios, mechanisms for addressing disputes and the daily assessment of open contracts.
It is also prescribed from the end of 2016 that counterparties must exchange bilateral securities.
In order to increase transparency, all derivative transactions (whether exchange-traded or OTC) must be notified by all counterparties to a trade repository.
The conclusion of a derivative transaction, any changes in the transaction as well as its termination must all be notified.
The European Securities and Markets Authority is responsible for the supervision of the trade repository.
Furthermore, EMIR also sets the requirements for the authorisation and ongoing supervision of central counterparties (CCPs) and prescribes greater cooperation between supervisory authorities.
The provisions contained in EMIR are apply directly in Austria, since EU Regulations are directly applicable. The national transposition of EMIR occurred with the issuing of the Central Counterparties and Trade Repositories Act (ZGVG – Zentrale Gegenparteien-Vollzugsgesetz), which has been in force since 14.11.2012.
Pursuant to Article 2 ZGVG the Financial Market Authority is the competent supervisory authority in Austria for monitoring of compliance of requirements under EMIR by central counterparties (CCPs) and non-financial counterparties.
For which financial instruments does the Regulation apply?
OTC derivatives under EMIR are derivatives as defined in Annex I Section C 4-10 of Directive 2004/39/EC (MIFID) which are not traded on a regulated market as defined in Article 4 (1) 14 of Directive 2004/39/EC or on a market in third countries, that has been deemed to be equivalent to a regulated market pursuant to Article 19 (6) of Directive 2004/39/EC. The notifications to the trade repositories, however, affect all derivatives (both exchange-traded and OTC derivatives).
LawEuropean Market Infrastructure Regulation, EMIR