Jargon Buster: EMIR European Market Infrastructure Regulation

What are the EMIR and over-the-counter markets?

The European Market Infrastructure Regulation (EMIR) was created to stabilise over-the-counter (OTC) markets in the EU and it was put into effect in August 2012. OTC markets include stocks, bonds, derivatives and debt securities traded within a dealer network, rather than through a centralised stock exchange. The companies carrying out OTC transactions are usually very small, so they use dealers to negotiate directly with other dealers, rather than trading in a large, formal arena like a stock exchange.

The EMIR requirements for OTC transactions and CCPs

The EMIR places several requirements on OTC transactions. Firstly, all OTC-traded derivatives must be reported. Secondly, certain OTC derivative types must go through a Central Counterparty Clearing House (CCP). CCPs are financial institutions that facilitate trading derivatives and equities in the EU to reduce risk for traders and increase stability in financial markets. Thirdly, trading repositories must be reported under the EMIR, and risk mitigation methods need to be used for derivatives that have not properly cleared. Finally, the EMIR places specific requirements on CCP and trade repositories to make sure they handle transactions correctly and make certain data available to the public.

Additionally, the EMIR includes various risk mitigation techniques. These include promptly confirming OTC transactions, regulating disputes and compressing and reconciling OTC portfolios. These techniques make the OTC market more stable and secure, and the EMIR stringently enforces them.

Who has to follow the EMIR?

Several financial entities have to follow the EMIR. In OTC transactions, all counterparties above the clearing threshold (specific amounts set by EMIR regulations for classes of OTC derivative contracts) must complete risk mitigation techniques and follow clearing and reporting requirements. Counterparties below the clearing threshold need to complete certain risk mitigation techniques, for example promptly confirming OTC transactions and compressing and reconciling OTC portfolios. They must also follow specific reporting procedures.

While most financial institutions must follow the EMIR, there are some exemptions. Intragroup transactions (transactions between companies in a group) and pension scheme arrangements have specific exceptions for clearing obligations and exemptions from exchanging collateral. The circumstances are different depending on each transaction and the specific scenario details, and financial consultants are usually required to determine whether certain entities qualify for exemption from EMIR or not.

Stay tuned for our next article to keep busting that financial jargon!