European Market Infrastructure Regulation (EMIR) legislation was passed on March 29, 2012 by the European Parliament. Similar to the Dodd-Frank Act, the regulation was geared towards increasing transparency and reducing the credit risks that came to prominence during the financial crisis in 2008. The original mandate for the regulation came from the G-20 Summit in 2009 with an objective to move the OTC market on-exchange, tradable on electronic platforms, or cleared through central counterparties. In situations in which the contract would not be centrally cleared, it would be subject to higher collateral requirements.
EMIR was designed to regulate the OTC derivatives market and meet three objectives:
- Increase transparency
- Reduce counterparty risk
- Reduce operational risk
EMIR covers a broad section of the OTC derivatives market including rates, equity, credit, and most foreign exchange and commodity contracts.
Clearing and Reporting
While the regulations cover all asset classes, it has exempted some companies which participate in the OTC market. The primary groups which will be required to clear and/or report to a trading repository are financial firms (banks, insurance firms, etc.) and non-financial corporations who have a large number of OTC positions. Exempt firms include non-financial corporations (below a threshold that takes into account positions with the purpose to hedge risk), governing institutions whose purpose it is to manage public debt, pension funds, and intra-group transactions.
The European Securities and Markets Authority (ESMA) will determine which contract will be cleared in addition to establishing a series of technical standards for the regulations.
We hope that this information will assist you, but it should not be used or relied upon as a substitute for your own independent research. For a more comprehensive view of the standards/requirements, please visit the respective issuer's website.