EU rules on over-the-counter derivatives contracts, central counterparties and trade repositories

SUMMARY OF:

Regulation (EU) No 648/2012 on over-the-counter (OTC) derivatives, central counterparties and trade repositories

WHAT IS THE AIM OF THE REGULATION?

The European market infrastructure regulation (EMIR) lays down rules regarding over-the-counter (OTC) derivative* contracts, central counterparties (CCPs)* and trade repositories*, in line with the G20 commitments made in Pittsburgh, United States, in September 2009.
EMIR aims to reduce systemic risk, increase transparency in the OTC market and preserve financial stability.
EMIR has been amended several times, most recently by Regulation (EU) 2022/2554, the Digital Operational Resilience Act (known as DORA), which seeks to ensure the financial sector is able to stay resilient through a severe operational disruption (see summary).

KEY POINTS

To increase transparency, EMIR requires that all information on all European derivative contracts is reported to trade repositories and made accessible to supervisory authorities, including the European Securities and Markets Authority (ESMA).
To reduce counterparty credit risk*, EMIR sets out strict organisational, business conduct and prudential obligations for CCPs. Standard derivative contracts must be cleared through CCPs (see clearing*).
With a view to strengthening the digital operational resilience of the European Union (EU) financial sector, amending Regulation (EU) 2022/2554 sets requirements for the resilience of network and information systems of CCPs and trade repositories to ensure they can withstand, respond to and recover from all types of ICT-related disruptions and threats.
To reduce operational risk* for OTC derivative contracts that are not centrally cleared, EMIR requires the counterparties to have robust procedures in place for the timely confirmation of the terms of contracts, to identify and resolve disputes early and to mark-to-market* on a daily basis the value of outstanding contracts. Moreover, the counterparties must exchange collateral and ensure that they have sufficient capital to manage the risk not covered by the collateral.
The clearing and reporting obligations apply to firms that have large holdings in OTC derivatives, including:
- financial firms, such as banks and insurance firms;
- non-financial firms, such as energy companies and airlines.

Exemptions

Intra-group transactions are exempted from central clearing, reporting and the obligation to exchange margins on non-centrally cleared OTC derivatives under certain conditions.
Pension scheme arrangements have been temporarily exempted since no viable solution has yet been developed to allow the participation of pension scheme arrangements in central clearing.
Certain public entities and international institutions are exempt from the scope of EMIR (with the exemption for reporting depending on the entity).
A suspension of the clearing obligation for certain OTC derivative contracts or certain counterparties is possible under certain circumstances.

The European Securities and Markets Authority’s responsibilities

ESMA is responsible for identifying contracts that should be subject to the clearing obligation, that is, those that are standardised and must be cleared by CCPs.
ESMA plays an important role in ensuring further EU harmonisation and cooperation between EU Member State authorities responsible for the supervision of EU CCPs.
ESMA is responsible for the recognition of non-EU-country CCPs that want to offer clearing services in the EU, and supervises non-EU-country CCPs that are systemically important for financial stability in the EU or one or more of its Member States (Tier 2 CCPs).
ESMA also supervises trade repositories.
Amending Regulation (EU) 2022/2554 requires ESMA to develop draft regulatory technical standards to specify the minimum content and requirements of the business continuity policy and the disaster recovery plan, excluding ICT business continuity policy and disaster recovery plans.

Competences

EMIR sets out the competences of:
- national competent authorities, colleges of supervisors and ESMA – for the authorisation and supervision of CCPs established in the EU;
- ESMA, the non-EU-country CCP college and the central banks of issue of EU currencies – for the recognition of non-EU-country CCPs and the ongoing supervision of the compliance of Tier 2 CCPs with EMIR.
The European Commission has adopted a number of delegated regulations, including technical standards on the basis of ESMA drafts, to supplement the terms of the regulation. The technical standards developed by ESMA cover a range of topics, including:
- capital requirements of CCPs;
- the minimum data to be reported to trade repositories;
- supervisory reporting of institutions of the liquidity coverage requirement.
It also has the power to adopt delegated regulations on a variety of aspects, including:
- amendments to the list of entities exempt from the regulation;
- rules of procedure relating to the imposition of fines or periodic penalty payments;
- measures to amend Annex II to take account of developments in the financial markets;
- the further specification of the type of fees, the matters for which fees are due, the amount of the fees and the manner in which they are to be paid.
It has adopted implementing decisions on a number of aspects, including the equivalence of the regulation regimes for CCPs in certain non-EU countries.

FROM WHEN DOES THE REGULATION APPLY?

It has applied since 16 August 2012.

BACKGROUND

OTC derivatives are generally negotiated privately. The information concerning them is consequently only available to the contracting parties, which can make it difficult to identify the nature and level of risks involved.

For further information, see:

Derivatives/EMIR (European Commission)
Financial stability: New Commission rules on central clearing for interest rate derivatives – press release (European Commission).

KEY TERMS

Over-the-counter (OTC) derivative. A derivative is a financial contract linked to the future value or status of an underlying entity such as an asset, index or interest rate. An OTC derivative is a derivative that is not traded on an exchange or an equivalent non-EU market but is instead privately negotiated between two counterparties, for example a bank and a manufacturer.

Central counterparty (CCP). A body that acts between the two counterparties to a transaction, acting as the buyer to every seller and the seller to every buyer. A CCP’s main purpose is to manage the risk of a counterparty being unable to make the required payments when they are due and defaulting on the deal.

Trade repository. A central data centre where details of derivatives transactions are reported. Trade repositories are commercial firms. There are global trade repositories for credit, interest rate and equity OTC derivatives (a particular class of derivative such as options or futures).

Counterparty credit risk. A risk that a counterparty, i.e. the other party in a financial transaction, will default on payment.

Clearing. All activities from the time a commitment is made for a transaction until it is settled.

Operational risk. A risk of loss resulting from inadequate or failed internal processes or external events, for example, fraud, human error or terrorism.

Mark-to-market. Assigning a value to an asset equal to the current market price of the asset or one calculated based on related standardised assets for which there is a market.

MAIN DOCUMENT

Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (OJ L 201, 27.7.2012, pp. 1–59).

Successive amendments to Regulation (EU) No 648/2012 have been incorporated into the original text. This consolidated version is of documentary value only.