EMIR: Need to know
A short guide to the regulation – who it affects and how it impacts them.
The regulation in brief
What is it?
• The European Market Infrastructure Regulation (EMIR) has been introduced by the European Parliament to increase transparency and reduce systemic risk related to all derivative activity that could affect the European Economic Area (EEA)
How does it impact corporates?
• It depends on the nature and scale of derivative activity undertaken. At a minimum, there is an obligation to report all derivative transactions and introduce some risk mitigation requirements. These requirements apply equally to derivatives with third parties and within the same group
• Some relevant Financial Counterparties including those within Non-Financial Groups will have slightly different obligations to those described below
Who does the regulation affect?
• All EEA financial and non-financial counterparties (NFCs) that transact derivatives will be affected to some extent
• Foreign - i.e. non-EEA - entities which transact with other foreign entities may also be affected if the transaction could have a ‘direct, substantial and foreseeable effect’ within the EEA
• All derivative activity, regardless of scale or purpose, is in scope
‘NFC’ or ‘NFC+’?
EMIR defines non-financial counterparties (NFCs) in two ways:
• An NFC is a derivative counterparty that is not a financial counterparty established in the EU
• An NFC+ is an NFC that currently exceeds one or more clearing thresholds and therefore must clear (a clearing threshold is the maximum gross notional of open derivative contracts that can be held across a consolidated group before each entity in that group has to clear all future, clearable derivatives)
What are EMIR’s requirements?
They can broadly be divided into three categories:
• Risk mitigation
- Timely confirmation requirements specify periods within which counterparties must agree legally binding trade confirmations. These became effective on 15 March 2013
- Also from 15 March 2013, NFC+ firms must notify their status (as NFC+) to their local regulator and be able to mark to market their derivatives on a daily basis
- All counterparties must periodically reconcile their open positions
- All NFCs and their counterparties must agree detailed procedures for dispute resolution before the execution of a transaction
- In the future, NFC+ entities will be forced to exchange collateral in respect of uncleared OTC derivatives. Further consultation will take place on this
- Starting later in 2013 (tentatively September for interest rate and credit derivatives), all derivative transactions, including intra-group derivatives, must be reported to a Trade Repository (TR).
- Trade Repositories (TR) must first be authorised by the European Securities and Markets Authority. The reporting requirement will start 90 days after the first TR has been authorised
- Information to be reported includes: contractual information; purpose of trade; whether the reporting entity is an NFC or NFC+; and a number of unique trade and entity identifiers which allow the TRs to link reporting from each of the parties involved to the transaction
- Reporting may be delegated to a third party or the other counterparty to the derivative. Irrespective of the reporting arrangement, legal responsibility for reporting remains with the counterparties to the transaction
- Clearing thresholds, by asset class, determine whether a corporate is an NFC or an NFC+. Entities within an NFC+ group will be forced to clear those derivatives that are subject to the clearing requirement. They can apply for intra-group exemptions
- The thresholds work on an ‘exceed one, clear all’ basis
- Hedging derivatives are initially excluded from the Clearing Threshold Assessment, but if the threshold is breached they become subject to the clearing requirement
- An NFC+ must clear all future, clearable derivatives for as long as it remains an NFC+
• Some of the requirements are already effective. Other risk mitigation requirements will start in September 2013. Reporting is also likely to start in September 2013, but the requirement is back-dated so some historic trades will also need to be reported back to 16 August 2012. Mandatory clearing may follow in summer 2014
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