What you need to know about the European Market Infrastructure (EMIR) Regulation

What is EMIR?

EMIR is a European regulation that was adopted across the EU in 2012 to increase transparency and reduce systemic risk in the over-the-counter (OTC) derivatives market.

EMIR was designed to increase the level of transparency in the OTC derivatives market, and therefore reduce systemic counterparty and operational risk - which is cited as one of the major causes of the 2008 financial crisis.

Who is subject to the EMIR rules?

This wide-reaching regulation imposes requirements on all entities that enter into, modify or terminate any derivative transaction (exchange-traded or OTC). This extends to entities not involved in Financial Services.

While the core regulatory text has seen limited changes since 2012, other derivatives-focussed regulation continues to necessitate clarifications to EMIR 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 Reporting Requirement

The most immediate and impactful requirement under EMIR 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 EMIR reporting fields of counterparty data, and 59 EMIR reporting fields of additional data.

EMIR 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 reporting 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 reduces 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.

What is the EMIR Refit?

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. 

EMIR Refit changes include:

  • Amendments to the definition of financial counterparties (FC) in relation to investment funds and central securities depositories
  • Introduction of a new category of “small financial counterparty”
  • Amendments in part to the threshold calculation and clearing requirements for NFCs
  • Amendments to the mandatory clearing timings of specific derivative for certain entities
  • Amendments to the reporting obligation in respect of historic derivative transactions and intra-group transactions
  • Clarification of who should be subject to the reporting obligation in certain scenarios
  • Reduction of the reporting burden for NFCs which fall below the clearing threshold

Implications of EMIR on financial firms

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, the choice is limited and license fees are high.