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EMIR

EMIR is aimed at reducing systemic risks in the European derivative market. EMIR does not only apply to banks and other financial institutions, but also to non-financial companies in that these companies are subject to financial market regulation directly for the first time. All companies trading in derivatives have to deal with Financial Market Authority supervision issues.

What is EMIR?

In the aftermath of the global financial crisis 2008, the heads of state and government of the leading industrial nations decided at the 2009 G20 summit in Pittsburgh to make over-the-counter (OTC) derivatives trading more transparent and safer. In particular, the G20 decided that standardised OTC derivatives shall be subject to central clearing, and that OTC derivatives shall be reported to trade repositories.

The G20 decision was 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), accompanied by several regulatory technical standards. Several amendments to EMIR were passed since then and should be taken into account, in particular EMIR REFIT 2.1 and EMIR REFIT 2.2.

Who is affected?

The EU Regulation contains requirements for 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 in accordance with Directive 2014/65/EU,
  • credit institutions in accordance with Directive 2013/36/EU,
  • insurance or reinsurance undertakings in accordance with Directive 2009/138/EC,
  • UCITSs and their management companies in accordance with Directive 2009/65/EC,
  • institutions for occupational retirement provision (IORP) as defined in point (1) of Article 6 of Directive (EU) 2016/2341/EU,
  • alternative investment funds managed by authorised or registered AIFMs as defined in point (a) of Article 4(1) of Directive 2011/61/EU,
  • central securities depositories in accordance with Regulation (EU) No 909/2014.

All other undertakings established in the EU are considered non-financial counterparties pursuant to Article 2(9) EMIR.

What are the main aspects 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.

Who is subject to the clearing obligation?

Standardised OTC derivatives shall be subject to a clearing obligation. With the amendments of EMIR REFIT 2.1, the clearing obligation applies to all financial and non-financial counterparties if they trade in derivatives to a larger extent, therefore exceeding specific clearing thresholds.

Provisions for financial counterparties (FC):

Pursuant to Article 4a(3) EMIR, an FC may calculate its OTC derivative positions against the clearing thresholds, and in doing so, it shall include all OTC derivative contracts entered into by that FC or by other entities within the group (FC and NFC) to which that FC belongs. The FC shall immediately notify ESMA and FMA, where it either does not calculate its relevant positions, or where the result of that calculation exceeds any of the specified clearing thresholds. In both cases, the FC shall become subject to the clearing obligation for all OTC derivative contracts pertaining to any class of OTC derivatives which is subject to the clearing obligation.

Provisions for non-financial counterparties (NFC):

In calculating its OTC derivative positions against the clearing thresholds, an NFC shall include all the OTC derivative contracts entered into by it or by other non-financial entities within the group to which the NFC 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. The NFC shall also immediately notify ESMA and FMA, where it does not calculate its positions, or where the result of that calculation in respect of one or more classes of OTC derivatives exceeds the specified clearing thresholds. The applicability of the clearing obligation depends on whether the NFC does not calculate or exceeds the clearing thresholds:

  1. Where the NFC does not calculate its relevant positions pursuant to Article 10(1) EMIR, it becomes subject to the clearin obligation for all OTC derivative contracts that pertain to any class of OTC derivatives which is subject to the clearing obligation.
  2. In contrast, where the NFC’s OTC derivative position exceeds the relevant clearing thresholds, the clearing obligation only applies to those OTC derivatives in respect of which the result of the calculation exceeds these clearing thresholds.

Clearing thresholds:

Delegated Regulation (EU) No 149/2013 determines the relevant clearing thresholds as follows:

  • EUR 1 billion gross notional value for OTC credit and equity derivative contracts
  • EUR 3 billion gross notional value for interest rate and foreign exchange derivative contracts
  • EUR 4 billion gross notional value for OTC commodity derivative contracts and all other OTC derivative contracts

Intragroup transactions:

Intragroup transactions as defined in Article 3 EMIR may be exempted from the clearing obligation under certain conditions. Details on the applicable conditions and the application process can be found in section Clearing of Intra-Group Transactions.

What is subject to the clearing obligation?

For the purposes of EMIR, an OTC derivative is a derivative contract the execution of which does not take place on a regulated market as within the meaning of Article 4(1)(14) of Directive 2004/39/EC (MiFID) or on a third-country market considered as equivalent to a regulated market in accordance with Article 19(6) of Directive 2004/39/EC (MiFID).

The European Commission has adopted several regulatory technical standards (RTS) specifying the class of OTC derivatives that should be subject to the clearing obligation, and the date or dates from which the clearing obligation takes effect, including any phase in and the categories of counterparties to which the obligation applies. ESMA shall establish, maintain and keep up to date a public register in order to identify the classes of OTC derivatives subject to the clearing obligation correctly and unequivocally.

So far, the following relevant RTS were adopted:

  • Delegated Regulation (EU) No 2015/2205 of 6 August 2015,
  • Delegated Regulation (EU) No 2016/592 of 1 March 2016,
  • Delegated Regulation (EU) No 2016/1178 of 10 June 2016,
  • Delegated Regulation (EU) No 2017/751 of 16 March 2017.

The relevant ESMA table lists all OTC derivatives currently subject to the clearing obligation:

  • Interest rate derivatives (basis swaps, fixed-to-float interest rate swaps, forward rate agreements (FRA) and overnight index swaps) in EUR, GBP, JPY and USD;
  • Interest rate derivatives (FRA and fixed-to-float swaps) in NOK, PLN and SEK;
  • Credit default swaps (index credit default swaps).

OTC derivative transactions that are not cleared via a CCP shall be subject to specific risk management requirements (risk-mitigation techniques pursuant to Article 11 EMIR). These include at least the timely confirmation of the terms of the relevant OTC derivative contracts as well as formalised processes which are robust, resilient and auditable in order to reconcile portfolios, to manage the associated risk and to identify disputes between parties early and resolve them, and to monitor the value of outstanding contracts.

Delegated Regulation (EU) No 2016/2251, which entered into force of the on 4 January 2017, stipulates the criteria for the eligibility of collateral as well as its size and calculation.

The obligation to exchange collateral applies to OTC derivative transactions entered into by financial counterparties (FC) or by an FC and a non-financial counterparties (NFC) exceeding the clearing threshold. It includes the exchange of initial margin and of variation margin. Pursuant to Article 36(1) RTS 2016/2251, initial margin shall be exchanged where both counterparties have, or belong to groups each of which has, an aggregate average notional amount of non-centrally cleared derivatives that is above EUR 8 billion. From 1 September 2022, counterparties shall exchange variation margin pursuant to Article 37(1) RTS 2016/2251 if they both have, or belong to groups each of which has, an aggregate average notional amount of non-centrally cleared OTC derivatives above EUR 3 000 billion.

In order to increase transparency, details of any derivative contract (whether exchange-traded or OTC) shall be reported to a trade repository by counterparties and CCPs. The notification to the trade repository shall include at least details on the derivative transaction concluded, any modification or termination of the contract.

The European Securities and Markets Authority has direct responsibilities regarding the registration, supervision and recognition of trade repositories. ESMA maintains a list of registered trade repositories on its website.

EMIR also sets the requirements for the authorisation and ongoing supervision of central counterparties (CCPs) and stipulates closer cooperation between supervisory authorities.

The provisions contained in EMIR applies directly in Austria since EU Regulations are directly applicable. Accompanying arrangements on a national level are stipulated in 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 national competent authority in Austria for the supervision of compliance with EMIR requirements of central counterparties (CCPs) and non-financial counterparties.

More information

European Market Infrastructure Regulation, EMIR

Regulation (EU) 2019/834 (EMIR 2.1)

Regulation (EU) 2019/2099 (EMIR 2.2)

Delegated Regulation (EU) No 149/2013

ESMA public register for the clearing obligation

Delegated Regulation (EU) No 2015/2205

Delegated Regulation (EU) No 2016/592

Delegated Regulation (EU) No 2016/1178

Delegated Regulation (EU) No 2017/751

Delegated Regulation (EU) No 2016/2251

Central Counterparties and Trade Repositories Act (ZGVG, in German only)

ESMA list of registered trade repositories

ESMA Q&A on EMIR Implementation