European Market Infrastructure Regulation

Last updated
European Market Infrastructure Regulation
European Parliament and Council of the European Union
PassedDecember 19, 2012
EnactedMarch 15, 2013
Status: Current legislation

The European Market Infrastructure Regulation (EMIR) is an EU regulation aimed at reducing systemic counterparty and operational risk and thereby prevent future financial system collapses. Its focus is regulation of over-the-counter (OTC) derivatives, central counterparties and trade repositories. It provides steer on reporting of derivative contracts, implementation of risk management standards and common rules for central counterparties and trade repositories.

Contents

The regulation was initially adopted in 2012 [1] and an amended version, the EMIR Refit regulation, was later on adopted in 2019. [2]

Overview

The European Market Infrastructure Regulation (EMIR) is EU regulation for over-the-counter (OTC) derivatives, central counterparties and trade repositories. [3] EMIR was introduced by the European Union (EU) as implementation of the G20 commitment to reduce systemic, counterparty and operational risk, and increase transparency in the OTC derivatives market. [4] It was also designed as a preventative measure to avoid fallout during possible future financial crises similar to the collapse that followed the Lehman Brothers bankruptcy in 2008. [5]

It establishes common rules for central counterparties, which interpose themselves between involved parties in a contract to serve as the focal point of each trade, [6] and trade repositories, which collect and maintain all records of trades. [7] EMIR requires the reporting of all derivatives, whether OTC or exchange traded, to a trade repository. [4] EMIR covers entities that qualify for derivative contracts in regards to interest rate, equity, foreign exchange, or credit and commodity derivatives. [3] It also outlines three sets of obligations, including the clearing, reporting and risk mitigation of applicable products. [8]

EMIR's set of obligations were designed to take effect on a phased basis over a period of several years. [9]

Key aspects

Entities that qualify for EMIR must report every derivative contract they enter into to a trade repository. They must also implement new risk management standards according to EMIR, including operational processes and margining related to their bilateral OTC derivatives. EMIR also covers trades that are not cleared by a central counterparty, and entities that qualify must submit all OTC derivatives subject to a mandatory clearing obligation for review. [3] Counterparties must file reports wherever they enter into derivatives transactions, in the European Economic Area or elsewhere. [10]

Clearing

The European Securities and Markets Authority (ESMA) applies mandatory clearing obligations for specific OTC derivative contracts if a contract has been assigned a central counterparty under EMIR. [11] The obligations require that over-the-counter derivatives trades are cleared through central counterparties. EMIR granted a temporary exemption from these guidelines to pension funds until August 2017. [3] [12] This exemption was further extended in a review of the regulation until 18 June 2021. [13]

All parties involved in trades must submit timely notifications of approaching, exceeding, and no longer exceeding the clearing threshold as defined by EMIR. This clearing regulation applies to financial counterparties such as banks, insurers, and managers of assets, as well as non-financial counterparties. [14]

Reporting

EMIR requires that all entities entering into derivative contracts must submit reports to their corresponding trade repositories, outlining each over-the-counter trade. [3] These mandatory reports must also include a Unique Transaction Identifier (UTI), legal entity identifier (LEI), information on the trading capacity of the counterparty, and the marked-to-market valuation of the position. [15] The counterparty data in a report includes 26 fields for data and the common data includes 59 fields of data. [15] These fields include an LEI, or a unique 20 digit alphanumeric code that may be used for eight of the 26 counterparty data fields, and the unique trade identifier, which are generated based on the report's LEI. [15]

Block trades, which are large-scale transactions of shares, and any subsequent allocations must be reported to the fund manager, but block trades concluded by a TR are not subject to the obligation. [16] [17] If the block trade is allocated to the manager's individual funds on the trade date, only the allocations need to be reported. [16] [17] In the event that the block trade is not allocated on the trade date, the block itself must be reported with the fund manager as counterparty. [16] [17]

Risk mitigation

One of EMIR's central purposes is to manage and avoid systemic risk. [18] EMIR, and other legislation like it, aim to reduce systemic risk in part by increasing regulations on clearing and trading, which decreases returns and industry efforts. [19] Under EMIR, the risk mitigation regime applies to contracts involving both EU countries and over the counter derivative contracts involving third country entities. [20] The risk mitigation standards outlined in EMIR's Article 11 impose risk management regulation on bilateral derivatives, as these derivatives are not appropriate for standard central counterparty clearing. [20]

EMIR also advises against front-loading over the counter derivatives, or applying any associated fees to sellers alone, as this practice typically increases systemic risk. [21] Other risk mitigation techniques as defined by EMIR include timely submission of reports and confirmations of adherence to regulation by all counterparties, and open reconciliation and compression of portfolios between involved parties. [22] Other techniques include a new dispute resolution process, daily market reports and exchanges and the public exchange of collateral between parties. [12]

History

Level 1

Regulation (EU) No 648/2012, as EMIR is referred to in European legal documentation, was implemented in 2012 through the standard co-decision procedure of the Council of the European Union, and the European Parliament, which set out a detailed framework for the legislation. [23]

The European Securities and Markets Authority (ESMA) began developing technical standards on regulation of OTC derivatives, central counterparties and trade repositories to implement EMIR in February 2012. [24] ESMA released a discussion paper on the topic, and in March 2012, the Authority held a public discussion in Paris to receive input on the questions put forth in the discussion paper. [24] [25]

Level 2

On June 25, 2012, ESMA released a consultation paper publicizing its proposed technical standards. [24] [25] In July, ESMA hosted another open hearing in Paris. The authority released a final draft technical standards to the European Commission on September 27, 2012. [24] [25]

EMIR entered into force on August 16, 2012, but most of its provisions only began to apply after a regulation's technical standards take place. [3] These technical standards were adopted by the European Commission on December 19, 2012. [26]

After more discussion and public reports, EMIR was published in the Official Journal of the European Union on July 27, 2012, and the technical standards of EMIR came into effect on March 15, 2013. [3] [9] [27]

Many involved parties expressed difficulty reporting during the first six months of the regulations being in effect, and many experienced delays in reporting. [3] [28] [29]

In July 2013, the European Commission adopted a Delegated EMIR Regulation to include the central banks and debt management offices in Japan and the United States to be exempt from EMIR. [30] [23] On July 12, 2013, ESMA published a discussion paper specifically describing the clearing obligation as defined by EMIR. The discussion was closed on September 16, 2013. [31]

In August 2013, UK Parliament reviewed a second EMIR statutory instrument, which outlines additional supervisory and enforcement powers allotted to central counterparties during trading and clearing. [32]

In September 2013, new obligations embedded into EMIR took effect, requiring EU banks and their counterparties to discuss and agree on processes and procedures for portfolio reconciliation and dispute resolution of derivatives executed in the OTC market. [3] [9] In October 2013, in response to the reported difficulties, ESMA announced that trade repositories should send back incomplete reports to counterparties, asking for their rectification, instead of trying to reconcile them. [3] [9] [29] In November 2013, ESMA published the final draft on EMIR's technical standards in regards to non-EU counterparties. [32] In January 2014, mandatory transaction reporting for OTC derivatives began under EMIR. [3] [9]

On October 1, 2014, ESMA began a consultation on EMIR's clearing obligation. The consultation closed on November 6, 2014. [31] ESMA published the eleventh iteration of its Q&A report on EMIR on October 24, 2014. [3] [9] In the report, ESMA announced that any third country firm not originally subject to EMIR trade reporting obligations that subsequently becomes a financial counterparty subject to EMIR must comply with the EMIR reporting obligation in respect of all outstanding derivatives contracts. [3] [9]

ESMA conducted another consultation on the technical standards of reporting under EMIR between November 10, 2014 and February 3, 2015. [31]

Mandatory reporting for exchange-traded derivatives began in January 2015, and in February of the same year, a European Commission report recommended an extension to the exemption until August 2017. [3] [9] As of March 2015, EMIR's regulations are under analysis in regards to pension funds, with the possibility of extending the extension to 2018. [3] [9] As of May 5, 2015, ESMA has been discussing a fourth consultation, this time revisiting the clearing obligation under EMIR. [31] The 2013 report on clearing indicated a need for further analysis of the classes of OTC interest rate derivatives denominated in other currencies than the ones included in the first report, and the 2015 consultation is expected to present new analysis and invite discussion on these other currencies. [31] The consultation is expected to conclude on July 15, 2015. [31]

Level 1 Review

A review of the regulation was published in the EU Official Journal on May 28, 2019. The review, known as EMIR Refit, was proposed by the European Commission to minimise the compliance burden on small financial and non-financial counterparties. Among other changes, the thresholds to be subject to the clearing obligations have been revised and an obligation for financial counterparties to report trades on behalf of non-financial counterparties has been introduced. [13]

See also

Related Research Articles

In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the underlying. Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation, or getting access to otherwise hard-to-trade assets or markets.

<span class="mw-page-title-main">Commodity market</span> Physical or virtual transactions of buying and selling involving raw or primary commodities

A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investing in commodities. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management.

The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets.

<span class="mw-page-title-main">Credit default swap</span> Financial swap agreement in case of default

A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt default or other credit event. That is, the seller of the CDS insures the buyer against some reference asset defaulting. The buyer of the CDS makes a series of payments to the seller and, in exchange, may expect to receive a payoff if the asset defaults.

Over-the-counter (OTC) or off-exchange trading or pink sheet trading is done directly between two parties, without the supervision of an exchange. It is contrasted with exchange trading, which occurs via exchanges. A stock exchange has the benefit of facilitating liquidity, providing transparency, and maintaining the current market price. In an OTC trade, the price is not necessarily publicly disclosed.

The Depository Trust & Clearing Corporation (DTCC) is an American post-trade financial services company providing clearing and settlement services to the financial markets. It performs the exchange of securities on behalf of buyers and sellers and functions as a central securities depository by providing central custody of securities.

In finance, a contract for difference (CFD) is a legally binding agreement that creates, defines, and governs mutual rights and obligations between two parties, typically described as "buyer" and "seller", stipulating that the buyer will pay to the seller the difference between the current value of an asset and its value at contract time. If the closing trade price is higher than the opening price, then the seller will pay the buyer the difference, and that will be the buyer's profit. The opposite is also true. That is, if the current asset price is lower at the exit price than the value at the contract's opening, then the seller, rather than the buyer, will benefit from the difference.

<span class="mw-page-title-main">Hong Kong Exchanges and Clearing</span> Holding company of the Stock Exchange of Hong Kong Ltd. and Hong Kong Futures Exchange Ltd.

Hong Kong Exchanges and Clearing Limited operates a range of equity, commodity, fixed income and currency markets through its wholly owned subsidiaries The Stock Exchange of Hong Kong Limited (SEHK), Hong Kong Futures Exchange Limited (HKFE) and London Metal Exchange (LME).

<span class="mw-page-title-main">Markets in Financial Instruments Directive 2014</span> European Union law

Markets in Financial Instruments Directive 2014, commonly known as MiFID 2, is a legal act of the European Union (EU). Together with Regulation No 600/2014 it provides a legal framework for securities markets, investment intermediaries, in addition to trading venues. The directive provides harmonised regulation for investment services of the member states of the European Economic Area — the EU member states plus Iceland, Norway and Liechtenstein. Its main objectives are to increase competition and investor protection, as well as level the playing field for market participants in investment services. It repeals Directive 2004/39/EC.

<span class="mw-page-title-main">Options Clearing Corporation</span> Financial services business

Options Clearing Corporation (OCC) is a United States clearing house based in Chicago. It specializes in equity derivatives clearing, providing central counterparty (CCP) clearing and settlement services to 16 exchanges. Started by Wayne Luthringshausen and carried on by Michael Cahill. Its instruments include options, financial and commodity futures, security futures, and securities lending transactions.

T2S (TARGET2-Securities) is a European securities settlement engine which aims to offer centralised delivery-versus-payment (DvP) settlement in central bank funds across all European securities markets. It is important to take note of the fact that T2S is not a central securities depository (CSD), but a platform intended to enable CSDs to increase their competitiveness.

A central clearing counterparty (CCP), also referred to as a central counterparty, is a financial market infrastructure organization that takes on counterparty credit risk between parties to a transaction and provides clearing and settlement services for trades in foreign exchange, securities, options, and derivative contracts. CCPs are highly regulated institutions that specialize in managing counterparty credit risk.

LCH is a financial market infrastructure company headquartered in London that provides clearing services to major international exchanges and to a range of OTC markets. The LCH Group includes two main entities: LCH Limited based in London and LCH SA based in Paris.

<span class="mw-page-title-main">Alternative Investment Fund Managers Directive 2011</span>

Alternative Investment Fund Managers Directive 2011 is a legal act of the European Union on the financial regulation of hedge funds, private equity, real estate funds, and other "Alternative Investment Fund Managers" (AIFMs) in the European Union. The Directive requires all covered AIFMs to obtain authorisation, and make various disclosures as a condition of operation. It followed the global financial crisis. Before, the alternative investment industry had not been regulated at EU level.

A Trade Repository or Swap Data Repository is an entity that centrally collects and maintains the records of over-the-counter (OTC) derivatives. These electronic platforms, acting as authoritative registries of key information regarding open OTC derivatives trades, provide an effective tool for mitigating the inherent opacity of OTC derivatives markets.

A Swap Execution Facility (SEF) is a platform for financial swap trading that provides pre-trade information and a mechanism for executing swap transactions among eligible participants.

ICE Clear Credit LLC, a Delaware limited liability company, is a Derivatives Clearing Organisation (DCO) previously known as ICE Trust US LLC which was launched in March 2009. ICE offers trade execution and processing for the credit derivatives markets through Creditex and clearing through ICE Trust™. ICE Clear Credit LLC operates as a central counterparty (CCP) and clearinghouse for credit default swap (CDS) transactions conducted by its participants. ICE Clear Credit LLC is a subsidiary of IntercontinentalExchange (ICE). ICE Clear Credit LLC is a wholly owned subsidiary of ICE US Holding Company LP which is "organized under the law of the Cayman Islands but has consented to the jurisdiction of United States courts and government agencies with respect to matters arising out of federal banking laws."

<span class="mw-page-title-main">Financial Market Infrastructure Act</span>

The Financial Market Infrastructure Act (FMIA), original title Finanzmarktinfrastrukturgesetz is a body of Swiss legislation for the regulation of financial market infrastructures and in particular derivatives. It was originally adopted by the Swiss Federal Assembly on June 19, 2015 and came into force on January 1, 2016.

A Unique Transaction Identifier (UTI), alternatively called Unique Swap Identifier is a globally unique identifier for individual transactions in financial markets. USIs were introduced in late 2012 in the U.S. in the context of Dodd–Frank regulation, where reporting of transactions to Trade Repositories first became mandatory. European financial market regulations followed suit, with reporting to Trade Repositories under EMIR requiring UTIs from February 2014 on. The use of the UTI is also mandatory for regulatory reporting under REMIT. Strictly speaking, the term USI is specific to the U.S. regulation, while UTI is specific to EU regulations. In practice, both terms are used interchangeable, in particular within large trading firms reporting under both regimes.

The Securities Financing Transactions Regulation (SFTR) is a body of European legislation for the regulation of securities lending and repo. It was published in the EU Official Journal on 23 December 2018.

References

  1. ↑ "2012 EMIR". 2022.
  2. ↑ "EMIR Refit 2019".
  3. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 "European Market Infrastructure Regulation (EMIR) – what you need to know". Financial Conduct Authority. 2014. Archived from the original on 17 March 2015. Retrieved 30 March 2015.
  4. 1 2 "Implications of a Financial Transaction Tax for the European Regulatory Reform Agenda" (PDF). City of London Corporation: 11. Archived from the original (PDF) on 5 March 2016. Retrieved 30 March 2015.
  5. ↑ "EMIR SPECIAL ISSUE 2014" (PDF). Bloomberg Briefs. Bloomberg Business. 4 February 2014. Retrieved 30 March 2015.
  6. ↑ "Central Counterparties". European Commission. Retrieved 1 June 2015.
  7. ↑ "Trade Repositories". European Commission. Retrieved 1 June 2015.
  8. ↑ "Evolving post-trade requirements in the new regulatory environment". Risk.net. 22 March 2015. Retrieved 30 March 2015.
  9. 1 2 3 4 5 6 7 8 9 "EMIR Special Report" (PDF). Bloomberg Business Briefs. 2014. Retrieved 30 March 2015.
  10. ↑ "Obligations for non-financial counterparties under EMIR". Financial Conduct Authority. 10 January 2013. Archived from the original on 16 March 2015. Retrieved 30 March 2015.
  11. ↑ "One Minute Guide - EU Regulation on OTC derivatives (EMIR)". Financial Conduct Authority. 9 December 2014. Archived from the original on 16 May 2015. Retrieved 1 June 2015.
  12. 1 2 "OTC derivatives and clearing obligation". European Securities and Markets Authority. Archived from the original on 16 July 2015. Retrieved 30 March 2015.
  13. 1 2 "EUR-Lex - 32019R0834 - EN - EUR-Lex". eur-lex.europa.eu. Retrieved 2019-09-13.
  14. ↑ "OTC derivatives and clearing obligation". ESMA. Archived from the original on 16 July 2015. Retrieved 4 June 2015.
  15. 1 2 3 Charlotte Hill (28 July 2014). "European Market Infrastructure Regulation (EMIR): Incomplete Reports Will Be Sent Back, Creating Costs and Other Burdens for Counterparties". National Law Review. Retrieved 30 March 2015.
  16. 1 2 3 Victoria Cooley. "EMIR Reporting Technical Standards". Financial Conduct Authority. Retrieved 30 March 2015.
  17. 1 2 3 "Trade Reporting". European Securities and Markets Authority. Retrieved 30 March 2015.
  18. ↑ James Williams (19 May 2015). "Focus on customisation to support HF operational workflows". HedgeWeek. Retrieved 1 June 2015.
  19. ↑ "Keeping transaction reporting up to scratch: you know it makes sense!". FTSE Global Markets. 5 May 2015. Retrieved 1 June 2015.
  20. 1 2 Niamh Moloney (2014). EU Securities and Financial Markets Regulation. Oxford University Press. p. 580. ISBN   9780199664344 . Retrieved 4 June 2015.
  21. ↑ ESMA (8 July 2014). "EMIR News Archive: European Commission response to ESMA letter regarding frontloading requirement under EMIR". Financial Conduct Authority. Archived from the original on 17 May 2015. Retrieved 4 June 2015.
  22. ↑ "Commission Delegated Regulation (EU) No 149/2013". Official Journal of the European Union. European Union. 51 (11). 2013. Retrieved 4 June 2015.
  23. 1 2 "Regulations". Official Journal of the European Union. European Union. 201. 2012. Retrieved 27 April 2015.
  24. 1 2 3 4 "Derivatives / EMIR". European Markets and Securities Authority. Retrieved 30 March 2015.
  25. 1 2 3 "Codecision Flowchart". The European Commission. 21 August 2012. Retrieved 13 April 2015.
  26. ↑ "EMIR: Frequently asked questions" (PDF). European Commission. 10 July 2014. Retrieved 1 June 2015.
  27. ↑ "Draft technical standards under the Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC Derivatives, CCPs and Trade Repositories" (PDF). Final Report. European Securities and Markets Authority. Archived from the original (PDF) on 9 April 2015. Retrieved 30 March 2015.
  28. ↑ "JWG regulatory trading digest - The end of the beginning: conclusions from Paris". Automated Trader Magazine. 2015. Retrieved 30 March 2015.
  29. 1 2 David Wigan (12 November 2014). "Industry divided as regulators mull NDF clearing". Euromoney Magazine. Retrieved 30 March 2015.
  30. ↑ "Adoption of a Delegated Regulation on the list of exempted entities under EMIR – 12.07.2013" . Retrieved 27 April 2015.>
  31. 1 2 3 4 5 6 "Consultations Overview". European Securities and Markets Authority. Retrieved 1 June 2015.
  32. 1 2 "FCA EMIR News Archive". Financial Conduct Authority. Archived from the original on 17 May 2015. Retrieved 1 June 2015.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.