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 II/R) 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 (EMIR REFIT). 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 (EMIR 2.2).
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- (together with smaller FCs), with turnover volume below certain thresholds, which may be exempt from the clearing obligation.
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
- Clearing members must provide clearing services to their clients based on FRANDT (fair, reasonable, non-discriminatory and transparent) commercial terms
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 increased 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 required 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, EMIR REFIT introduced the obligation for FCs to report on behalf of NFC-
- Pension fund exemption from the clearing obligation will phased-out by 2023 at the latest
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
- More disclosures on IM models to their users
- Protection of the IM from CCP bankruptcy
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
- EMIR REFIT is beneficial in rationalising and optimising its requirements and by making obligations more proportionate. Thanks to advocacy actions, only some targeted provisions have been modified avoiding unnecessary costs for the industry.
- With EMIR 2.2,the EU Commission introduced a new regime for the supervision of the EU CCPs and the authorisation of third-country CCPs. Third-country CCPs will be classified using a “tiering” methodology: non-systemically important CCPs (or Tier 1) and systemically important CCPs (or Tier 2). The level 2 measures, which are still in discussion, need to guarantee that the Commission and ESMA will classify third-country CCPs according to objective criteria while allowing CCPs and market players to anticipate the category they will fall into.
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 2020 - Phased-in implementation of margin requirements for non-centrally cleared OTC derivatives
January 2019 - End of trialogue negotiations on EMIR REFIT and start of the trialogue negotiations on EMIR 2.2.
June 2019 - Entry into force of EMIR REFIT December 2019 - publication of “EMIR 2.2” in the Official Journal of the European Union
September 2019 (and January 2020) – Application of new thresholds and conditions to margin requirements
June 2020 - Deadline for entry into force of provisions on reporting to TRs (EMIR REFIT)
July 2020 - 3 Delegated Acts published in draft by the EC (tiering, comparable compliance and fees for third-country CCPs)
2020 - ESMA review of TC CCPs “recognition” (Key Supervisory Priorities for 2020)
June 2021 – Deadline for entry into force of provisions on access to clearing - FRANDT