On 4 July 2012 the EU Council formally approved the Regulation on OTC derivatives, central counterparties and trade repositories, which the European Parliament had already adopted at first reading on 29 March 2012. The Regulation, which is also known as the European Market Infrastructure Regulation or EMIR, will enter into force shortly after its forthcoming publication in the Official Journal of the EU.
EMIR will radically change the OTC derivatives landscape. Market participants will have to review and, in many cases, adapt their current OTC practices (including documentation, such as ISDA Master Agreements and collateral arrangements).
EMIR is part of the European implementation of the commitments made at the G-20 Pittsburgh summit of September 2009 with regard to over-the-counter (OTC) derivatives. In line with these commitments, EMIR aims to:
increase transparency regarding OTC derivatives; reduce counterparty credit risks under OTC derivative transactions; and reduce operational risks in relation to those transactions. Key features
Key features of EMIR are:
the mandatory clearing of "eligible" OTC derivatives between certain parties through a central counterparty (CCP); requirements pertaining to risk management of derivatives transactions that are not centrally cleared; the mandatory reporting of all exchange-traded and OTC derivatives to a trade repository; and the authorisation, registration and recognition of CCPs and trade repositories, and their supervision. Mandatory central clearing of OTC derivatives
OTC derivatives must be cleared through a CCP if they meet the following conditions:
they belong to a class of derivatives that has been declared subject to the clearing obligation by the Commission, pursuant to a proposal by ESMA; and they have been concluded between two parties each of which falls into one of the following categories ("qualifying counterparties"): financial counterparties such as investment firms, credit institutions (banks), insurers and reinsurers, pension funds and alternative investment funds (AIFs) managed by authorised or registered managers; non-financial counterparties established in the EU whose OTC derivative positions net of their commercial and treasury financing hedges exceed a clearing threshold to be set by the Commission; third-country (i.e. non-EU) entities that would be subject to the clearing obligation if they were established in the EU (although an OTC derivative...