EMIR - What does EMIR regulate?

Clearing obligation

EMIR obliges counterparties to clear specified classes of OTC derivatives centrally through a CCP under certain conditions. CCPs act as intermediaries between the two parties to a transaction and guarantee to both parties that the agreed obligations are met. In other words, CCPs effectively act as counterparty to both the buyer and the seller of OTC derivatives.

OTC interest rate swaps and OTC credit swaps are the first derivatives scheduled to be centrally cleared under the clearing obligation.

Authorisation requirement for CCPs

EMIR also introduces an authorisation system for CCP’s.

Requirement to report to trade repository

EMIR stipulates that counterparties and CCPs must report the details of every derivatives contract they conclude to a registered trade repository. They are also obliged to report amendments to contracts and terminations of contracts. The reporting obligation thus applies to OTC derivatives traded through CCPs, non-cleared OTC derivatives and derivatives traded in regulated markets or multilateral trading facilities (exchange-traded derivatives – ETDs). See the section on reporting obligations below for the applicable timelines.

Risk-mitigation techniques 

Counterparties that conclude OTC derivative contracts not cleared by a CCP are required to manage the relevant operational and counterparty credit risks. Under EMIR, they are required to apply the following risk-mitigation techniques:

1. timely mutual confirmation of the conditions governing OTC derivative contracts,
2. portfolio reconciliation,
3. portfolio compression,
4. a procedure for dispute resolution,
5. daily mark-to-market valuation and 
6. adequate exchange of collateral and possibly capital funding.

The latter requirement under (vi) will apply from September 2016. The EBA website provides more detailed detailed information.