EMIR: One Minute Guide

What is EMIR?

In 2009 the G20 pledged to undertake reforms aimed at increasing transparency and reducing systemic counterparty risk in the over-the-counter (OTC) derivatives market. The European market infrastructure regulation (EMIR) implements most of these pledged reforms in the European Union (EU). EMIR covers OTC derivatives, central clearing counterparties (CCPs) and trade repositories (TRs). EMIR entered into force on 16 August 2012 with the first obligations relating to TRs and CCPs coming into force in March 2013. The final key requirements are due to come into force in the second half of 2015 with some provisions being phased in until 2020.

KEY EMIR REQUIREMENTS

• Reporting: all new and outstanding derivatives contracts are required to be reported to an authorised TR.
• Clearing: the European Securities and Markets Authority (ESMA) can impose mandatory clearing obligations through a CCP for eligible OTC derivative contracts once a CCP has been authorised under EMIR for that type of contract.
• Non-cleared transactions: for contracts that do not qualify for mandatory clearing, all counterparties are required to comply with operational risk management requirements (including timely confirmation, valuation, reconciliation, compression and dispute resolution).
• Collateral: for financial counterparties, contracts not cleared through a CCP will be subject to bilateral collateral requirements.
• Non-financial counterparties: will only be subject to clearing and bilateral collateral requirements if their OTC derivatives positions are large enough and are not directly reducing commercial risks or related to treasury financing activity.
• Common rules: for CCPs and TRs.

WHICH ENTITIES DOES EMIR APPLY TO?

EMIR applies to entities established in the EU entering into derivatives contracts, and in some cases indirectly to non-EU entities trading with EU parties (although non-EU counterparties will not have to report to a TR). There are two main categories of counterparty to a derivatives contract:

• Financial counterparties (FCs), including banks, insurers, investment firms and fund managers.
• Non-financial counterparties (NFCs), ie any counterparty that is not classified as a financial counterparty, including entities not involved in financial services.

KEY EMIR REQUIREMENTS CURRENTLY IN FORCE

From March 2013 — notification requirements:

• NFCs entering into positions in OTC derivatives contracts exceeding the clearing thresholds specified by ESMA must notify their competent authority of that breach under Art 10(1) of EMIR.

• legal and contractual terms of OTC derivative trades must be agreed between counterparties and confirmed within specified timelines.
• From 15 September 2013 — risk management techniques:
• counterparties must agree on arrangements for portfolio reconciliation before trading OTC contracts not cleared through a CCP.
• processes and procedures must be in place for the recording, monitoring and resolution of disputes. UK disputes valued at over €15m, and outstanding for 15 business days, or more, must be reported to the Financial Conduct Authority (FCA).
• counterparties with over 500 non-cleared contracts with a single counterparty, must analyse the possibility of reducing counterparty risk through portfolio compression. This analysis should be undertaken at least twice per year.

From early 2014, the first EU CCP authorisations began to take place following which the process of identifying derivatives cleared by authorised or recognised CCPs has been continuing since. ESMA has since analysed several derivative classes including interest rates, credit, equity and FX OTC derivatives and has proposed some of them for the clearing obligation.

12 February 2014 — the reporting start date for all derivative classes came into force.

13 July 2015 — ESMA published an updated list of CCPs which are authorised under EMIR and its Public Register for the Clearing Obligation.

6 August 2015 — the Commission adopted a delegated regulation that makes it mandatory for certain OTC interest rate derivatives to be cleared through CCPs.

UPCOMING EMIR REQUIREMENTS

31 October 2015 — ESMA expects TRs to implement the validation rules as set out in their revised EMIR Q&A on Level 2 validation for trade reporting.

Q3/4 2015 — First clearing obligations likely, but will be subject to phasing-in. Further RTS expected from ESMA; these have been postponed in the light of ongoing global development of international standards.

1 December 2015 — RTS on risk-mitigation techniques for OTC derivatives contracts not cleared by a CCP under EMIR to come into force (subject to a four-year transitional period).

December 2015 — Anticipated date for variation margin requirements to come into effect. Initial Margin Requirements with a threshold of up to €50m expected to be phased in between 1 December 2015 and 1 December 2019.

1 September 2016 — In March 2015 the Basel Committee on Banking and IOSCO released a revision to the implementation schedule for margin requirements for non-centrally cleared derivatives. A delay of nine months was agreed. This has pushed the start of the phase-in period for posting and collecting margin from 1 December 2015 to 1 September 2016.

1 December 2019 — End of four-year transitional period for RTS on risk-mitigation techniques for OTC derivatives contracts not cleared by a CCP under EMIR.

31 December 2020 — End of the transition period for implementing the margin requirements for non-centrally cleared derivatives (as set out by the Basel Committee on Banking and IOSCO).

CHECK YOUR COMPLIANCE WITH EMIR

FCs and NFCs should assess their compliance with EMIR and future obligations. Below are some questions to think about:

• Which TRs can you report to for the types of derivatives you trade? Will you report directly to the TR or delegate reporting to your counterparty or a third party?
• Which CCPs clear the types of OTC derivatives you trade? Will you access clearing directly as a “clearing member”? If not, you will need to be a client of a clearing member.
• Are your existing documentation, systems and processes adequate to implement the operational risk mitigation requirements set out in EMIR?
• Do you have collateral agreements in place and sufficient collateral available to collateralise non-cleared OTC derivative trades?

This blog post was written by Melanie Ball PSL lawyer in the Financial Services team.