An overview of the European Market Infrastructure Regulation (EMIR)
The European Market Infrastructure Regulation, otherwise known as EMIR, was created with the intention of stabilizing over-the-counter (OTC) markets found within EU member states. EMIR has been in effect since August 2012.
An over-the-counter market consists of the trading of stocks, bonds, derivatives, or debt securities within a dealer network rather than through a centralized stock exchange. The companies that participate in OTC transactions are generally very small, which is why they have dealers negotiate with other dealers on the phone directly, rather than being placed in a large, formal arena.
Once the European Market Infrastructure Regulation (EMIR) was enacted, OTC transactions took on several new requirements. Firstly, all OTC derivatives were now to be reported. Similarly, it also became necessary for certain types of OTC derivatives to go through Central Clearing. EMIR also made reporting to trade repositories mandatory and required that certain risk-mitigation techniques be applied to handle OTC derivatives that had not been properly cleared. Lastly, certain requirements pertaining to both CCPs and trade repositories now must be fulfilled in order to ensure that all transactions are handled correctly and that certain data is made available to the public.
EMIR requires many different types of risk mitigation techniques. Some of these include regulating disputes, confirming OTC transactions in a timely manner, and both compressing and reconciling OTC portfolios. These risk mitigation tactics all seek to make the OTC market significantly more secure and stable, and they are enforced quite stringently.
Several types of financial entities are required to follow EMIR. All financially related counterparties and non-financially related counterparties that are above the clearing threshold are required to successfully complete risk mitigation techniques, as well as to properly abide by clearing and reporting obligations. Similarly, non-financially related counterparties that are below the clearing threshold must still complete certain risk mitigation techniques, such as regulating disputes, confirming OTC transactions in a timely manner, and both compressing and reconciling OTC portfolios. These non-financially related counterparties too must follow certain reporting obligations.
Additionally, OTC derivatives must complete risk mitigation techniques while also abiding by clearing obligations. All derivatives face reporting obligations, and all types of financial instruments must follow specific CCP requirements. Both CCPs and trade repositories have their own tailored sets of requirements.
Although most financial entities must abide by EMIR, there are certain scenarios where an entity may be exempt. Intragroup transactions and pension scheme arrangements are allowed certain exceptions regarding clearing obligations, as well as exemptions regarding the exchange of collateral. These circumstances vary depending on the scenario and specific details for each case, so it is best to consult a financial adviser to find out whether or not a specific entity qualifies.