The European Market Infrastructure Regulation (EMIR) is Europe’s response to the G20 commitment to regulate over-the-counter (OTC) derivatives markets in the aftermath of the financial crisis. Corresponding measures in the United States are set forth in the Dodd Frank Act (Title VII).
In Europe, the execution of OTC derivatives is regulated under the Markets in Financial Instruments Directive (MIFID), whereas EMIR settles the issues relating to central clearing, bilateral margining and reporting.
EMIR aims to:
- Reduce systemic risk and increase transparency in the OTC markets
- Impose central clearing for standardised, sufficiently liquid OTC derivatives, mandatory bilateral margining for certain non-centrally cleared OTC derivatives and reporting to Trade Repositories (TRs) of all derivative trades
- Regulate central counterparties (CCPs) and trade repositories (TRs)
- Allow interoperability among CCPs for equity and bond clearing
In May 2017, the EU Commission published its EMIR review proposal. It aims to improve the functioning of the derivatives market in the EU and provide simpler and more proportionate rules for OTC derivatives. In June 2017, the EU Commission issued the second part of the EMIR review, concerning CCP supervision in the EU and third-country CCPs seeking access to the EU.
- All financial counterparties (FCs) including banks, brokers, asset managers and insurers and certain non-financial counterparties (NFCs) consisting mainly of corporates. EMIR makes a distinction between NFC+, with pre-defined activity thresholds identical to FCs, and NFC-, with turnover volume below certain thresholds
EMIR focuses on OTC derivatives with several key initiatives:
- Clearing obligations for sufficiently liquid and standardised OTC derivatives
- Risk mitigation techniques for non-centrally cleared OTC derivatives (bilateral margin)
- Mandatory reporting of all derivatives transactions to a TR
EMIR also regulates EU CCPs for all financial instruments cleared (including listed derivatives and cash equities), and TRs. All EU CCPs must follow an authorisation process via their national competent authorities. Non-EU CCPs also need to be recognised by ESMA as “qualifying CCPs”, provided that the European Commission (EC) has made an equivalence determination for the jurisdiction where the CCP is domiciled.
EMIR has had a profound impact on the way financial and non-financial participants operate their OTC derivative contracts.
- Collateral requirements significantly increase for all participants, due to CCP mandatory clearing for sufficiently liquid and standardised OTC derivatives and mandatory margin requirements for non-centrally cleared OTC derivative trades
- In addition, operational complexity and collateral protection require consideration and the development of adequate legal and operational frameworks
- All counterparties (with no exception) must report their derivative transactions to a TR and thus develop reporting solutions. However, the ongoing revision of EMIR may alleviate the reporting burden for NFC-
CCPs must implement certain new requirements:
- The authorisation process with national competent authorities and/or ESMA
- Rules on internal organisation and risk management procedures
- Segregation and portability
As a result of EMIR, clearing brokers must adapt by disclosing fees and costs, and by providing adequate account segregation and protections for collateral.
BNP Paribas Securities Services’ view
- The review of EMIR (EMIR REFIT) was launched in May 2017. It will not alter the key EMIR provisions, namely the clearing mandate and the bilateral margin obligations, which have recently been implemented. However, the EMIR revision could be beneficial in rationalising and optimising its requirements and by making obligations more proportionate; but it should remain limited in scope and avoid unnecessary costs for the industry.
In June 2017, the EU Commission issued a second proposal for EMIR review with a new regime for the supervision of the EU CCPs and the authorisation of third-country CCPs. The Commission’s proposal could be quite consequential for the industry if they are applied to non-EU CCPs. BNP Paribas’ position is that the interests and integrity of the EU financial industry should play a primary role in all supervisory decisions, including those relating to third-country CCPs.
August 2012 - EMIR legislative process is finalised and the regulation enters into force
March 2013 - Start date for effective implementation with risk mitigation techniques for non-centrally cleared OTC
May 2017 - European Commission proposal for EMIR REFIT
June 2017 - Second European Commission proposal for EMIR review – CCP Supervision package
2017 to 2019 - Phased-in implementation of margin requirements for non-centrally cleared OTC derivatives
2019 - Expected entry into force of the revised EMIR
Download the regulatory memo:
How insurers can make the most of their liquid assets
Welcome to the tri-party
The collateral management challenge in Europe