European Market Infrastructure Regulation (EMIR)

This section is for informational purposes only. For further information, please visit ESMA's website.

Please note that EMIR is not applicable to individuals.

If you are a representative of an EU legal entity and you are not familiar with the EMIR requirements and how they may affect your cooperation with Deltastock, we strongly recommend that you seek independent legal advice.

Regulation (EU) No 648/2012 or The European Market Infrastructure Regulation (EMIR) is effective from 12 February 2014. Its main purpose is to increase transparency and reduce systemic risks associated with the derivatives markets.

Main EMIR implementations:

  • reporting derivative transactions to trade repositories
  • clearing obligations for OTC derivative transactions
  • risk mitigation for uncleared trades
  • requirements for central counterparties (CCPs) and trade repositories (TRs)

1. EMIR entities Classifications:

  • Financial Counterparty (FC)
    FCs are the following legal entities: investment firms, credit institutions, insurance, assurance and reinsurance undertakings, UCITS, institution for occupational retirement provision, Alternative Investment Fund managed by AIFMs, authorised pursuant to the applicable EU Directives.
  • Non-Financial Counterparty Exceeding The Clearing Threshold (NFC+)
    NFC+s are legal entities established in the EU that are not FC, Central Counterparty ("CCP"), trade repository, or trading venue, but have unhedged derivative positions above the clearing thresholds:
    • €1bn in gross notional value for OTC credit and equity derivatives (individual thresholds)
    • €3bn in gross notional value for interest rate and FX (individual thresholds)
    • €3bn in gross notional value for commodities and others (combined threshold)
  • Non-Financial Counterparty (NFC)
    NFCs are the same as NFC+s but with unhedged derivative positions below the clearing threshold. If the positions of an NFC exceed any of the thresholds above, the NFC must immediately notify ESMA and its national competent authority. From that point onward, the legal entity will be classified as an NFC+, and will have to start clearing all relevant future OTC derivatives contracts within four months.

2. Reporting under EMIR:

  • All counterparties (FC, NFC+ and NFC) to all derivatives contracts (OTC and exchange-traded) need to report contract details to a registered trade repository.

This applies to all trades in the EEA.

All updated list of the Registered Trade Repositories can be found on the ESMA's website.

3. Clearing under EMIR:

OTC derivatives contracts that ESMA has determined subject to a mandatory clearing obligation must be cleared by a central counterparty (CCP).

A clearing obligation will apply to contracts between any combination of:

  • Financial Counterparties; and
  • NFCs that are above the clearing threshold ("NFC+")

Mandatory clearing obligations will apply to trades between such firms where:

  • One or more of the counterparties is in the EU; and
  • In limited circumstances, neither in the EU

Summary on the Reporting and Clearing obligations:

Requirement FCs NFCs + NFCs
Reporting Yes Yes Yes
Clearing Yes Yes No

4. Risk mitigation for uncleared trades

  • risk mitigation requirements for uncleared OTC derivative trades
    • Timely confirmation
      • Applies to both counterparties
      • Confirmation deadlines are applicable per asset class
    • Dispute resolution
      • All counterparties must have agreed procedures and processes to identify, record, and monitor disputes relating to contract recognition or valuation and exchange of collateral; and resolve disputes in a timely manner
      • Financial counterparties must report disputes of an amount or value greater than €15m and outstanding for at least 15 business days
    • Portfolio Reconciliation
      • Companies will be required to agree with their counterparties before trading how portfolios will be regularly reviewed to identify any disagreements regarding key terms or valuations and reconciled
      • They must cover the key trade terms and the valuation methodology
      • They may be delegated to a counterparty or a third party
        Counterparty Number of trades with 1 counterparty Frequency of reconciliation
        FCs and NFCs + 0 – 50 trades Quarterly
        51 – 500 trades Weekly
        Over 500 trades Daily
        NFCs 0 – 100 trades Annually
        Over 100 trades Quarterly
    • Portfolio compression
      • All counterparties with 500 or more non-cleared OTC derivative contracts outstanding with a single counterparty. The main goal is similar or offsetting transactions to be replaced with a smaller number of transactions with a lower notional value amount.
      • All counterparties are required to analyse the possibility of portfolio compression to reduce counterparty risk at least twice a year.
      • Counterparties must be able to explain if they have concluded that compression is not appropriate.
  • margin requirements for counterparties (FC and NFC+) subject to the clearing obligation
    • Initial and variation margin
    • Daily valuation

Summary on the Risk mitigation obligations:

Requirement FCs NFCs + NFCs
Timely confirmation Yes Yes Yes
Dispute resolution Yes Yes Yes
Portfolio Reconciliation Yes Yes Yes
Portfolio Compression Yes Yes Yes
Margin for uncleared OTCs Yes Yes No
Daily valuation Yes Yes No

5. Legal Entity Identifier (LEI)

Both FCs and NFCs shall obtain LEI in order to comply with the EMIR reporting obligations.

LEI aims to respond to the need to distinctly identify the legal entities (FCs and NFCs) involved in financial transactions in order to manage counterparty risk.

The LEI is issues under the ISO 17422standard. This standard makes it possible to establish codes with 20 alphanumeric characters to which additional public data (name, address, status of the identifier, etc.) and non-public data (legal form, "parent" entities, i.e. the entity that is liable in the event of failure, etc.) are attached.

A list of all organizations or agencies (so-called pre-LOUs) belonging to the LEI/GEI system, and which have been endorsed by ESMA, can be found on The Legal Entity Identifier Regulatory Oversight Committee – LEIROC’s website.