Implementing Measures Of European Market Infrastructure Regulation Take Effect


New clearing, risk mitigation, and reporting obligations imposed on certain derivative contracts.

On 15 March, the first six implementing measures of the European Market Infrastructure Regulation (EMIR) entered into force, marking the beginning of the gradual implementation of EMIR over the next two years. EMIR applies widely to both financial and nonfinancial counterparties to derivative contracts, including energy derivatives. In particular, new clearing and risk mitigation requirements for uncleared trades will apply to over-the-counter (OTC) derivative contracts, and a new reporting requirement will apply to both OTC and exchange-based derivative contracts. Some of these requirements are already in force.

In the short term, firms entering into derivative contracts should ensure that compliant recordkeeping and valuation measures are in place and that OTC trades are promptly confirmed to counterparties. In the longer term, firms should prepare for the implementation of a full suite of EMIR reporting obligations, further risk mitigation measures, and the entry into force of a clearing obligation for eligible derivative contracts.

What is EMIR?

EMIR entered into force on 16 August 2012, with the aims of managing counterparty credit risk more effectively and increasing the transparency and stability of OTC derivative markets. Until the first six implementing measures took effect on 15 March, almost all aspects of EMIR had yet to take effect under secondary implementing measures.

EMIR creates a new regulatory framework for counterparties to derivative contracts, central counterparties (CCPs), and trade repositories. This LawFlash addresses the regime in respect of counterparties to derivative contracts.

What Obligations Does EMIR Impose?

EMIR imposes the following three broad categories of obligations on most undertakings established in the European Economic Area (EEA) (and, in some cases, those established elsewhere) that enter into derivative contracts:

A clearing obligation for OTC derivatives. This obligation requires all eligible derivative contracts between certain counterparties (as discussed below) to be cleared through a CCP. A register of eligible derivative contracts will be made available on the European Securities and Markets Authority's (ESMA's) website. However, in some cases, the clearing obligation will have retrospective effect for the period between approval of a CCP for clearing a specific class of derivatives and the date on which the clearing obligation for a particular eligible derivative contract takes effect. In this way, clearing of derivative contracts will be "frontloaded". Risk mitigation requirements for uncleared OTC derivatives. Pending the authorisation of CCPs, all OTC derivatives that would otherwise be subject to the clearing obligation will be subject to the risk mitigation requirements for uncleared OTC derivatives, insofar as those requirements are in force. After the implementation of the clearing obligation, OTC derivative contracts falling outside the scope of the clearing obligation will remain subject to the risk mitigation requirements. Timely confirmation, portfolio compression and reconciliation, marking-to-market, collateral exchange, and capital requirements are the main categories of risk mitigation techniques. A reporting obligation for all derivative contracts. This obligation requires all derivative contracts entered into in the EEA to be reported to a trade repository. When phasing-in is complete, details of the conclusion, modification, or termination of a derivative contract must be reported by the end of the following working day but will likely amount to almost real-time reporting. One aspect of the reporting obligation already in force is the obligation on counterparties to keep a record of any derivative contract for at least five years following the termination of the contract. To Which Derivatives Does EMIR Apply?

The derivative contracts falling within the scope of EMIR are derived from Annex I, Section C (4)-(10) of the Markets in Financial Instruments...

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