European Market Infrastructure Regulation (EMIR) - A Guide for Financial and Non-Financial Counterparties

Josef Bergt
2023

Abstract

The European Market Infrastructure Regulation (EMIR) serves as a cornerstone in the European Union's regulatory framework for mitigating systemic risks in the derivatives market. Originating from the G20 summit resolutions of 2009, EMIR imposes a myriad of obligations on various parties involved in derivative transactions. This article elucidates the intricacies of EMIR, delineating its scope, obligations, and the necessary actions that financial and non-financial counterparties must undertake to ensure compliance.

Introduction

In the aftermath of the 2008 financial crisis, the G20 summit in 2009 in Pittsburgh set forth a global agenda to enhance the transparency and security of the over-the-counter (OTC) derivatives market. Subsequently, the European Union enacted the European Market Infrastructure Regulation (EMIR) in August 2012, which underwent revisions under the EMIR-Regulatory Fitness and Performance Program (EMIR-REFIT) and came into effect on June 17, 2019. EMIR aims to mitigate systemic risks by imposing a set of obligations on parties involved in derivative transactions, including reporting to the national supervisory authority and the European Securities and Markets Authority (ESMA).

Who is Affected?

EMIR categorizes parties involved in derivative transactions into financial and non-financial counterparties. Financial counterparties encompass a broad range of entities, such as credit institutions, insurance companies, and alternative investment funds, among others. Conversely, all other companies domiciled in the EU and EEA are classified as non-financial counterparties.

Regulatory Scope

EMIR primarily focuses on standardized OTC derivatives, imposing a clearing obligation through Central Counter Parties (CCPs). The regulation also mandates risk management requirements for transactions not suitable for central clearing and necessitates the reporting of derivative transactions to a transaction register.

Obligations and Compliance

Financial and non-financial counterparties are obligated to monitor whether they exceed the clearing thresholds set by EMIR and its Technical Standards. Upon exceeding these thresholds, parties are required to inform the national supervisory authority and ESMA promptly. EMIR also imposes specific risk management requirements, including the timely confirmation of transactions and the regular evaluation of business portfolios.

Action Required

Counterparties have the option to calculate whether they exceed the clearing threshold. Failure to perform this calculation or exceeding the threshold makes them subject to clearing obligations for all asset classes. Counterparties must also ensure that their contracts comply with EMIR requirements, potentially requiring amendments to existing agreements or the adoption of new protocols.

Conclusion

EMIR serves as a pivotal regulatory framework in the EU's efforts to mitigate systemic risks in the derivatives market. Compliance with EMIR is not merely a regulatory requirement but a critical component in risk management strategies for financial and non-financial counterparties alike. Failure to comply can result in penalties, making it imperative for affected parties to understand and fulfill their obligations under EMIR.

Source: BaFin on European Market Infrastructure Regulation (EMIR)

Executive Summary:

• EMIR aims to mitigate systemic risks in the derivatives market.
• Financial and non-financial counterparties are subject to various obligations under EMIR.
• Compliance requires continuous monitoring and potential adjustments to contractual agreements.
• Non-compliance can result in significant penalties.