What is EMIR?

The European Markets Infrastructure Regulation (EMIR) is a European regulation that applies to all legal entities and natural persons performing an economic activity in the EU that enter into or will enter into a derivatives transaction. 

EMIR mainly contains rules for Over-The-Counter (OTC) derivatives contracts, but also for exchange-traded derivatives (ETDs). EMIR rules aim to assure more transparent and safe trading in OTC derivatives. The rules have gradually been phased in since 2012.

Why EMIR

After the financial crisis in 2008, the G20 members agreed on a number of measures in order to minimize the risk of a similar financial crisis in future. The G20 members agreed to draft new national and/or international rules for derivatives transactions with the aim of improving the safety and transparency of the financial markets. A number of the G20 agreements that apply to the EU have been laid down in EMIR.

EMIR Refit: what are the most important rules?

As of 17th June 2019 EMIR Refit entered into force. As a result of EMIR Refit a number of rules have been revised to assure a more transparent and safe market in OTC and ETD derivatives.

Counterparty classification
All counterparties will be classified as one of the following categories:

  • FC+: financial counterparties, e.g. banks, that exceed the clearing thresholds;
  • FC-: financial counterparties that do not exceed the clearing thresholds;
  • NFC+: non-financial counterparties that exceed the clearing thresholds; and
  • NFC-: non-financial counterparties that do not exceed the clearing thresholds.

The most important EMIR rules are the risk mitigating obligations, the central clearing obligations of the FCs+ and NFCs+, reporting obligations and the obligation to have a valid LEI during the term of the derivative contract. The paragraphs below will go into further detail on a few of the mentioned obligations.

Definition financial counterparty 
The definition of financial counterparty has been extended additional entity types which are perceived to be a systemic risk for the financial system. These are the: (i) Alternative investment firms (AIF's) irrespective of the location of their alternative investment fund manager (AIFM); and the (ii) Central securities depositaries (CDSs).

Exemption of the clearing obligation
Under EMIR Refit the scope of the clearing obligations has been changed. As with non-financial counterparties financial counterparties with asset classes which do not exceed the clearing thresholds are exempted of the clearing obligations. If the positions of the financial counterparty and the non-financial counterparty exceed the clearing threshold or if they do not calculate these asset classes, the financial and non-financial counterparties have to inform their national competent authority and the ESMA (European Securities and Markets Authority). 

Financial and non-financial counterparties which choose to not calculate their positions are always subject to the clearing obligations.

Clearing thresholds
Every 12 months, a financial counterparty taking positions in OTC derivative contracts may calculate its aggregate month-end average position for the previous 12 months. In calculating the positions, the financial counterparty shall include all OTC derivative contracts entered into by that financial counterparty or entered into by other entities within the group to which that financial counterparty belongs. The average position must be compared to the applicable clearing thresholds below.

Asset Classes Clearing threshold in gross national value
Credit derivatives € 1 billion
Equities derivatives € 1 billion
Interest rate derivatives € 3 billion
Foreign exchange derivatives € 3 billion
Commodity and other derivatives € 3 billion

To which products does EMIR apply?

EMIR has consequences for OTC and ETD derivatives such as:

  • Equity derivatives
  • Interest rate derivatives
  • FX derivatives (except FX spot products); and
  • Commodities derivatives (except energy spot products)

Questions?

If you have any questions regarding the counterparty classification or possible amendments that apply to you, please contact our FX specialists. We also want to advise you to consult an external party on the rules and obligations of EMIR that apply to you. For the specific EMIR rules, please refer to EMIR and EMIR Refit.