European Market Infrastructure Regulation (EMIR) – some things you need to know

| January 29, 2014

From Basel III to new European financial transaction taxes, a string of fresh regulations are already starting to reshape the financial landscape across global markets and will continue to do so over the coming years. One such regulation, which was first introduced in August 2012, is the European Market Infrastructure Regulation (EMIR).

European Market

What is it?

The EMIR requirements focus on the derivative markets between EU and non-EU firms in order to improve transaction transparency and help reduce risks associated with these types of transactions. These risks in question include counterparty credit risk and operational risk for bilaterally cleared ETD and OTC derivatives. As a result, all counterparties who trade derivatives will be obligated to report their actions to trade depositories.

Timeline

EMIR focuses on the EEA derivatives market, where trade repositories and central counterparties have been created to assist for the 12 February 2014 EMIR go-live. Firms will need to retrospectively report any derivative contracts which they entered into before, on or after 16 August 2012. However,  firms have three years from the reporting start date for the asset class in question to comply with historical trades. According to the Financial Conduct Authority (FCA), the technical standards were passed through Council and the EU Parliament on 19 February 2013, and further technical standards regarding OTC derivatives reported to trade repositories and requirements for trade repositories and central counterparties were published on 15 March 2013.

Derivatives within the EMIR context

EMIR is targeting all derivative transactions, with no exemptions, for non-EEA derivatives or index or basket products. The regulations include OTC and exchange traded derivatives as well as retail derivatives, equity, currency, commodity and credit. However at the time of writing, exchange traded warrants are not included.

Counterparties must also adhere to a clearing obligation in which they will be required to clear all derivatives subject to the obligation between two counterparties, either financial or non-financial, as well as any dealings with a third party member which would be subject to the same criteria if it were established in the European Union.

Who will be affected?

All firms who trade in derivatives will be affected by the changes although non-EU counterparties will not have to report to a trade repository. As mentioned above, the type and size of the derivative does not matter in the eyes of the regulation nor does the industry in which counterparties are involved with. Therefore, EEA financial and non-financial counterparties, will both be subject to the same standards.

What does it mean in real terms?

Any firm that is subject to EMIR needs to select a trade repository to report to before the 12 February 2014 go-live date. There are a few trade repositories that have been authorised by the European Securities Markets Authority (ESMA), such as UnaVista part of  London Stock Exchange Group.

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