The European Market Infrastructure Regulation (EMIR), adopted across the EU in 2012, is designed to greatly increase the level of transparency, and therefore reduce the systemic counterparty and operational risk in the over-the-counter (OTC) derivatives market, which is cited as one of the major causes of the 2008 financial crisis.
The most immediate and impactful requirement is the mandate for all entities to report their derivative transactions on a T+1 basis to their corresponding trade repository. These reports include 26 fields of counterparty data, and 59 fields of additional data.
Reporting can be conducted by third parties on a firm’s behalf, which can help companies meet their obligations, but with limited solutions in the market, some firms are still struggling to comply.
Clarifications to the 2012 regulation continue to be provided by ESMA through 2020, meaning even the firms who have achieved compliance need to ensure they are consistent with the new guidance.
EMIR also provides new requirements for the risk management of derivatives trading and clearing, mandating clearing of specific OTC derivative transactions through Central Counterparties (CCP). These rules apply to any firms that meet specific thresholds within each asset class.
These thresholds, and other exemptions, were reiterated in the ‘EMIR Refit’, implemented in 2019. However, even if firms are currently under the regulatory threshold for certain requirements, they must monitor and inform regulators if they approach or pass this. While this generally reduced the regulatory burden on small financial and non-financial firms, other firms have had to take on additional responsibilities and are now obligated to report trades on behalf of their non-financial counterparties.
Most European legislations periodically undergo the European Commission’s regulatory fitness and performance programme (Refit), whereby they are reviewed for potential enhancements and improvements. This process was completed for the EU’s EMIR regime in 2019, with changes implemented in July the same year to address compliance costs, transparency issues and insufficient access to clearing for certain counterparties.
This is referred to as EMIR Refit and introduced a range of updates to the existing regime to streamline the reporting obligations, improve the quality of the data reported, make supervision more effective and increase access to clearing by removing unnecessary obstacles.
Specific changes include those for “small financial counterparties” who became exempt from the obligation to clear their transactions through a CCP, while remaining subject to risk mitigation obligations. Smaller non-financial counterparties (NFCs) also saw reduced clearing and reporting obligations.
As EMIR was introduced across Europe, hundreds of financial firms suddenly needed to find a solution to help them comply efficiently and accurately. Several years later, and even after the EMIR Refit, achieving EMIR compliance is still a significant undertaking for firms.
The complexity of the reporting rules has driven up the demand for skilled staff and with only a few EMIR solutions in the market, choice is limited and license fees are high.
Matt Smith, CEO of SteelEye