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European Market Infrastructure Regulation (EMIR)

EMIR is an EU regulation designed to enhance the transparency and safety of the derivatives market by mandating clearing, reporting, and risk mitigation practices.

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What is EMIR?

The European Market Infrastructure Regulation (EMIR) is a central regulation drafted by the European Union that was implemented to increase transparency and reduce the risks associated with the derivatives market. EMIR focuses on improving the reporting and mitigation of systemic risk and supports the stability of the financial system by requiring the clearing of certain types of derivatives through central counterparties (CCPs). It mandates the reporting of all derivatives to trade repositories and the use of risk mitigation techniques for non-centrally cleared derivatives.

Key Features of EMIR

The EMIR Regulation thoroughly explores various facets of derivatives compliance:

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Risk Management

Mandatory Clearing of certain over-the-counter (OTC) derivatives through CCPs

The European Market Infrastructure Regulation (EMIR) mandates the clearing of certain Over-The-Counter (OTC) derivatives through Central Counterparties (CCPs). The purpose of this requirement is to increase transparency and reduce the risks associated with these types of transactions. CCPs act as intermediaries between parties in a derivatives contract, which can help to mitigate counterparty credit risk.

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Risk Mitigation Techniques for non-centrally cleared derivatives

EMIR outlines risk mitigation strategies for non-centrally cleared derivatives, addressing the risks these Over-The-Counter (OTC) transactions pose to counterparties and financial stability. EMIR advises using sound risk management procedures, including the discretionary use of models for initial margin calculations. The European Central Bank (ECB) prefers a flexible approach, allowing models without a formal validation process but with regulatory oversight.

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Reporting Obligations to trade repositories for all derivatives

The European Market Infrastructure Regulation (EMIR) requires all entities entering into any form of derivative contract, including those not traded on an exchange, to report to a trade repository. This reporting obligation applies to both financial and non-financial counterparties. The report should be made no later than the next working day following the conclusion, modification or termination of the contract.

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Increased Transparency and oversight in the derivatives market

EMIR aims to enhance the safety and transparency of Over-The-Counter (OTC) derivatives markets. It does so by making it mandatory for OTC derivative contracts to be reported to trade repositories and cleared through central counterparties (CCPs). The transparency brought about by EMIR is beneficial to both market participants and regulators, fostering a more secure and efficient financial market.

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Reduced Systemic Risk and enhanced financial stability

The European Market Infrastructure Regulation (EMIR) is part of a broader framework of regulations designed to reduce systemic risk and enhance financial stability across the EU. This framework includes measures such as the Alternative Investment Fund Managers Directive and the Regulation on Money Market Funds, which aim to mitigate risks outside the regular banking system.

Implications of EMIR

Financial organizations are required to update their ICT systems, optimize processes,and train employees to adhere to these new standards, thus enhancing the overalldigital resilience of the financial sector in Europe.

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How Grand Helps

Each component of's GRC software suite is essential for achieving full compliance with the EMIR regulation, addressing specific aspects such as OTC derivatives clearing, risk mitigation for non-centrally cleared derivatives, reporting obligations to trade repositories, and ongoing adaptation to regulatory amendments.

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Frequently Asked Questions

Which derivatives require mandatory clearing under EMIR?

The European Market Infrastructure Regulation (EMIR) does not specify the exact derivatives that require mandatory clearing. However, it does provide a framework for determining which derivatives should be subject to such requirements, based on market developments and transparency needs.

The regulation allows for certain credit default swaps, particularly those referencing globally systemic banks, to be centrally cleared. Derivative contracts that are linked to the financial solvency of pension scheme investments under certain conditions are excluded from the clearing obligation for a certain period. However, the specifics of which derivatives require mandatory clearing under EMIR would be determined by the European Securities and Markets Authority (ESMA) and the European Commission.

What risk mitigation is required for non-centrally cleared derivatives under EMIR?

Risk mitigation for non-centrally cleared derivatives under EMIR requires financial counterparties to apply robust risk management procedures. These procedures could involve the use of models for initial margin calculation to reduce the underlying risk from the relevant transactions.

Competent authorities can take action to ensure these models are sufficiently robust and credit institutions are encouraged to report sufficient information on risk management procedures, including the performance of initial margin models[1]. Additionally, the European Central Bank (ECB) suggests introducing a requirement for high-level disclosures on the usage of initial margin models for transparency.

The ECB also proposes the expansion of the scope of regulatory technical standards by ESMA to lay down conditions under which commercial bank guarantees may be accepted as collateral.

What are EMIR's reporting requirements to trade repositories?

The European Market Infrastructure Regulation (EMIR) imposes certain reporting obligations on parties involved in derivative contracts. All derivative contracts, whether OTC or exchange traded, need to be reported to a trade repository authorized or recognized by ESMA .

The reporting should include details of any derivative contract they have concluded as well as any modification or termination of the contract . The reporting obligation applies to financial and non-financial counterparties, and must be done no later than the working day following the conclusion, modification or termination of the contract . It's important to note that EMIR reporting requirements aim to increase transparency and reduce risks associated with the derivative market .

How do recent changes to EMIR affect our compliance strategy?

Recent changes to EMIR (European Market Infrastructure Regulation) have introduced the concept of "small financial counterparties" (SFCs) which are exempt from the obligation of centrally clearing their over-the-counter (OTC) derivative contracts . This means that if your organization falls under the SFC category, you may experience a shift in compliance strategy as you're no longer obliged to clear these transactions via a central counterparty.

However, SFCs are still required to report these transactions to a trade repository . EMIR changes also include more stringent risk mitigation techniques for non-cleared OTC derivative contracts . So, your compliance strategy would need to accommodate these new requirements, ensuring that your non-cleared OTC derivative contracts meet these risk mitigation standards .

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