EMIR (European Market Infrastructure Regulation)

What is EMIR?

The regulation includes new requirements for derivatives trading, both OTC derivatives[1] (over-the-counter non-exchange traded derivatives) and listed derivatives, in addition to laying down harmonised requirements for the organisation, conduct and management of central counterparties[2] and derivative trade repositories[3]. A central counterparty is a legal entity that interposes itself in derivative contracts between counterparties, becoming the buyer to every seller and the seller to every buyer. Trade repositories (TRs) are legal persons that collect and maintain the records of derivatives. The aim of the regulation is to improve transparency and mitigate risk in derivative markets.

EMIR consists of Regulation (EU) no. 648/2012, as well as the Commission implementing regulation and delegated regulations that implement technical standards. The technical standards can be Regulatory Technical Standards (RTS) or Implementing Technical Standards (ITS) and concern further implementation of the provisions of Regulation (EU) no. 648/2012.

The Regulation entered into force in the European Union on 16 August 2012 and has been implemented in phases. 

What does EMIR entail?

The scope of the regulation is quite broad, but it affects parties within the European Economic Area (EEA), as well as parties outside the EEA who engage in derivatives trading with counterparties within the EEA. Thus the regulation includes not only requirements for financial undertakings, but also other parties in the market that engage in derivatives trading.

EMIR places requirements on everyone who enters into derivative contracts, including interest rate, currency, equity, debt and commodity derivative contracts to:

• Report them to the derivatives trade repository;

• Meet new risk mitigation requirements for all non-centrally cleared OTC derivative contracts,

• Clear all OTC derivative trades that are subject to the clearing obligation at a central counterparty.

Counterparty categories

When parties enter into a derivative contract, including options, forward contracts and swap agreements in currency, interest, debt instruments, commodities and equity, the parties in question become counterparties to each other in the transaction.

According to EMIR, a distinction is drawn between counterparties in derivatives trading and they are divided into two categories:

• Financial Counterparties (FCs): These include investment firms, credit institutions, insurance companies, pension funds, mutual funds and their management companies, as well as Alternative Investment Fund Managers (AIFMs).

• Non-financial counterparties (NFC): These include all those who do not fall under the definition of financial counterparties.

Non-financial counterparties can be divided into two subcategories:

• Those who hold positions in derivative contracts that amount to more than the threshold specified in Article 10 of the Regulation (NFC+); and

• Those who hold positions that amount to less than the clearing threshold values specified in Article 10 of the Regulation (NFC-); and the clearing thresholds according to Article 10 of the EMIR are further specified in Article 11 of derivatives regulation (EC) no. 149/2013 . They are as follows:

• EUR 1 billion for OTC credit derivative contracts and equity derivative contracts

• EUR 3 billion for OTC interest rate derivative contracts and foreign exchange derivative contracts

• EUR 3 billion in gross notional value for OTC commodity derivative contracts and other derivatives (aggregate)

If a non-financial counterparty exceeds the aforementioned clearing threshold values, it shall notify the FSA immediately. If it falls below this clearing threshold, it must also report it immediately. These notifications can be sent using the following forms:

Notification of non-financial counterparty of exceeding the clearing threshold in accordance with article 10(1) of Regulation (EU) 648/2012 (EMIR)

Notification of non-financial counterparty of no longer exceeding the clearing threshold in accordance with article 10(2) of Regulation (EU) 648/2012 (EMIR)

Notifications to Trade Repositories

One of the innovations that comes with EMIR is the reporting obligation. This means that information on derivative contracts must be submitted to the derivatives trade repository when the contracts are created, modified or closed. Derivative trade repositories are a new type of financial market service provider and their role is to centrally collect and maintain data on derivatives trading. More information about trade repositories can be found on the ESMA website.

The information must be submitted to a derivative trade repository which has been registered with (this applies to derivative trade repositories within the EEA) or approved by ESMA (this applies to derivative trade repositories outside the EEA). The reporting obligation applies equally to financial counterparties and non-financial counterparties, regardless of the clearing threshold values (FC, NFC+ and NFC-).

In the absence of a derivative trade repository, the information should be submitted directly to ESMA.

Who needs to submit notifications?

Any party who enters into a derivative contract must fulfil the reporting obligation. This means that both counterparties to the transaction must report it, unless they have agreed between themselves that one of the parties will handle the reporting for both counterparties. If the counterparties have made such an agreement, this must be specifically mentioned in the report. It is possible for counterparties in derivatives trading to outsource reporting to a third party.

What contracts need to be reported?

Reports must be submitted on all trades in derivative contracts no later than the end of the trading day following the conclusion of the contract (T+1). This applies equally to OTC derivatives and exchange traded derivatives.

The reporting obligation is partly retroactive. This means that notifications must be submitted for all derivative contracts that were previously made and were still outstanding on 1 July 2017, in addition to all contracts that were entered into after that date and until 1 October 2018, when the reporting obligation took effect in Iceland. Different reporting start dates apply to these retroactive reports and they depend on when the agreements were made and what their duration is or was. Further information on the reporting start dates can be found in Commission Implementing Regulation (EU) no. 1247/2012.

What information must be included in the reports?

The counterparties must each submit information in two parts: On the one hand, so-called counterparty information and, on the other hand, general information about the trade.

The information to be included in the reports is specified in the Implementing Regulation (EU) no. 148/2013.

Special attention is drawn to the fact that ESMA expects all counterparties to identify themselves with a Legal Entity Identifier (LEI). Information on the LEI identifier can be obtained at the Legal Entity Identifier Regulatory Committee website (LEIROC).

Choosing a derivative trade repository

Reports may only be sent to a derivative trade repository that has been approved or recognised by ESMA. To date, eight derivative trade repositories have been approved. A list of the trade repositories that have been approved or recognised can be found on the ESMA website. Counterparties are responsible for selecting the trade repositories they want to report to. It should be noted that there are no trade repositories located in Iceland.

Risk mitigation requirements

EMIR requires that financial and non-financial counterparties meet certain risk mitigation requirements for all derivative contracts that have not been cleared by a central counterparty. Strict requirements are placed on financial counterparties and non-financial counterparties with positions above the clearing thresholds specified in Article 10 of EMIR (NFC+), but reduced requirements are placed on non-financial counterparties with positions below the aforementioned clearing thresholds values (NFC-).

The requirements entail that counterparties must be able to, inter alia, confirm the terms of a contract in a timely manner, portfolio reconciliation and compression, dispute resolution procedures, booking the daily market value of outstanding contracts, and the exchange of collateral and possessing sufficient equity to mitigate non-collateral exchange risks.

The table below lists the measures stipulated by EMIR to mitigate the risk of derivatives that are not centrally cleared and the different requirements placed on the various categories of counterparties.

The Financial Supervisory Authority of the Central Bank of Iceland urges counterparties to fully familiarise themselves with the requirements that apply to them.

Clearing obligations

Derivatives clearing is the procedure of establishing the positions, including calculations of net liabilities and ensuring that financial instruments, cash, or both, are available to hedge exposures arising from the positions. With central clearing, the central counterparty enters into an agreement between the counterparties, becoming the buyer to every seller and the seller to every buyer.

The clearing obligation applies to all OTC derivative contracts belonging to the classes of OTC derivatives, which by definition are subject to the clearing obligation. ESMA is responsible for determining which classes of derivative contracts are subject to the clearing obligation.

Trades are to be cleared by central counterparties that have been authorised (central counterparties within the EEA) or have been approved by ESMA (central counterparties outside the EEA).

Who will be required to clear trades with central counterparties?

Financial counterparties and non-financial counterparties with positions exceeding the clearing thresholds according to Article 10 of EMIR (NFC+) are required to clear all OTC derivative contracts that are subject to the clearing obligation. Non-financial counterparties below the clearing threshold value (NFC-) do not have to clear their derivative trades.

Anyone is allowed to centrally clear any derivative, as long as a central counterparty clears that class of derivatives and both counterparties agree to it. With regard to derivative contracts that are subject to the clearing obligation, there is a mandatory obligation to centrally clear them.

Which derivative classes are subject to the clearing obligation?

ESMA decides which classes of derivative contracts are subject to the clearing obligation. ESMA uses two methods to do this:

• The Bottom-up method where ESMA determines which classes will be subject to the obligation based on the derivative contracts, which the central counterparty has already been authorised to clear; and

• The "Top-down" method where ESMA identifies and decides on its own initiative which classes will be subject to the clearing obligation on the basis of derivative contracts, which central counterparties have not been authorised to clear.

On ESMA's website there is a (PDF file) list of all the classes of derivatives which central counterparties in Europe have been authorised to clear and could therefore potentially be subject to the clearing obligation in the future.

At present, no classes of derivatives are subject to the clearing obligation, but a draft of three technical standards is currently being examined by the European Commission. When these technical standards are approved, the clearing obligation will take effect for the classes of derivatives specified in the technical standards.

Selecting a central counterparty

Clearing therefore requires contracts that are subject to clearing obligations from central counterparties that have been granted a special operating license or been approved by ESMA. A (PDF file) list of all the central counterparties that have been authorised or approved can be found on the ESMA website. It should be noted that not all central counterparties have the authorisation to clear all the classes of derivatives that may be subject to clearing obligations.

When do counterparties need to start clearing contracts?

The clearing obligation takes effect at different times, which are determined not only by when a certain class of derivatives have been made subject to clearing obligations, but the timing is also determined by the type of counterparty.

The technical standards, issued by the European Commission on which classes of derivatives are subject to clearing obligations, provide a detailed breakdown of the categorisation of counterparties. This categorisation then determines when the counterparty in question needs to start clearing the contracts that are subject to the obligation. The period from the issuance of the technical standards and when the clearing obligation comes into effect until the counterparties have to start clearing their derivative contracts can last from six months to three years, depending on the category of the counterparties.

Further information on this can be found in ESMA's final reports to the Commission, as well as consultation papers published by ESMA. The documents are available on the ESMA website.

Exemptions from the provisions of EMIR

EMIR grants two types of exemptions for intra-group trading in derivatives: from clearing obligation and the delivery of collateral for OTC derivative contracts that are not cleared by a central counterparty. If both counterparties are within the EEA, the FSA must be notified that such an exemption is being exercised, but if only one of the counterparties is within the EEA and the other is outside, they must apply to the FSA for such an exemption.

Notification or applications for such exemptions can be sent using the links below:

Notification of the exercise of an exemption for intra-group OTC derivatives trading

Application for exercising an exemption for intra-group OTC derivatives trading

Further information

More information can be found at ESMA's website and the EU Commission website. Market participants are encouraged to familiarise themselves with the documents on these websites before contacting the Financial Supervisory Authority. The documents provide answers to many questions that may arise.

All inquiries regarding EMIR should be sent to emir@sedlabanki.is

[1] OTC derivative: Derivatives that are not traded on a regulated securities market in the sense of item 14 of Article 4(1) of Directive 2004/39/EC or in a third country market, which is considered equivalent to a regulated securities market, in accordance with Article 19(6) of Directive 2004/39/EC.

[2] Central counterparty: A legal entity that enters into agreements between counterparties that are traded in one or more financial markets and thereby becoming the buyer to every seller and the seller to every buyer. 

[3] Derivative trade repository: A legal entity that centrally collects and maintains records of derivatives.