EMIR Compliance: European Market Infrastructure Regulation
Regulation (EU) 648/2012 has governed EU OTC-derivatives since 2012, imposing central clearing, risk-mitigation and T+1 trade-reporting to trade repositories. The EMIR Refit (Reg 2019/834) streamlines small-counterparty rules and introduces ISO 20022 reporting-syntax from 29 April 2024, reinforcing data quality and systemic-risk oversight.
What is EMIR?
EMIR reduces systemic risk in the EU derivatives market by requiring standardised OTC contracts to be cleared through authorised or recognised CCPs, while non-cleared trades must meet bilateral margin and risk-mitigation techniques such as timely confirmation, portfolio reconciliation and compression. All derivatives, exchange-traded and OTC, must be reported to a trade repository no later than T+1 under MiFIR Article 26, with reports migrating to ISO 20022 XML on 29 April 2024. Counterparties are categorised as FC, NFC+ or NFC-, each with tailored thresholds and obligations. The 2019 EMIR Refit shifts reporting responsibility to FCs on behalf of NFCs and eases clearing for small financial counterparties.
Key Features of EMIR
The EMIR Regulation thoroughly explores various facets of derivatives compliance:
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.
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.
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.
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.
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
Counterparties must classify status, clear mandated products, post bilateral margin, migrate reporting to ISO 20022 by 29 Apr 2024 and monitor ESMA data-quality feedback. Preparations should also consider future “EMIR 3” proposals on active-account requirements at EU CCPs.
Grand: Enhancing EMIR Compliance
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How Grand Helps
Each component of Grand.io'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.
Frequently Asked Questions
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.
Standardised OTC derivatives in classes declared by ESMA must be centrally cleared via an authorised or recognised CCP.
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 .
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 .
