Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories (European Market Infrastructure Regulation, EMIR) aims to increase transparency and reduce risks in the derivatives market. EMIR regulates the performance of activities of central counterparties and trade repositories and also sets out a number of obligations, to be addressed in more detail herein, for all undertakings that enter into derivative contracts. A Commission proposal for a regulation amending EMIR is pending, and it includes certain amendment proposals for the obligations addressed here (see Application and timetable).
To whom does EMIR apply?
EMIR applies to all undertakings that enter into derivative contracts. The application of the EMIR obligations depends, however, on whether the undertaking is, according to the Regulation,
- a financial counterparty (FC) or
- a non-financial counterparty (NFC).
Undertakings which are financial counterparties under the Regulation are defined separately, and other undertakings are non-financial counterparties.
According to the definition in Article 2(8) of EMIR, financial counterparties are:
- investment firms
- credit institutions
- life, non-life and reinsurance undertakings
- collective investment undertakings and their management companies
- institutions for occupational retirement provision
- authorised or registered alternative investment funds managed by alternative
- investment fund managers (AIFMs)
The application of the EMIR obligations to non-financial counterparties depends on whether the gross notional values of their derivative positions exceed the clearing threshold specified under the Regulation. The calculation of positions takes into consideration all of the OTC derivative contracts made by a counterparty and entities belonging to the same group with it, excluding however those derivative contracts that reduce risks directly relating to the group’s commercial or treasury financing activity. The Financial Supervisory Authority (FIN-FSA) and the European Securities and Markets Authority (ESMA) must be notified if the threshold is exceeded. (See Notifications to the FIN-FSA.) In practice, very few non-financial counterparties exceed the clearing thresholds.
Under Article 11 of Commission Delegated Regulation (EU) 149/2013, adopted pursuant of Article 10(4) of EMIR, the clearing thresholds in terms of gross notional values are:
- EUR 1 billion for OTC credit derivative contracts
- EUR 1 billion for OTC equity derivative contracts
- EUR 3 billion for OTC interest rate derivative contracts
- EUR 3 billion for OTC foreign exchange derivative contracts
- EUR 3 billion for OTC commodity or other derivative contracts
The application of the EMIR obligations further depends on whether, in the manner explained in more detail below, a derivative contract is an OTC derivative contract or not and whether it is cleared by a central counterparty (CCP).
What are the EMIR obligations?
The EMIR clearing obligation requires financial counterparties and non-financial counterparties which exceed the clearing threshold to clear the OTC derivative contracts concluded between each other in a CCP authorised and recognised under the Regulation. The clearing obligation does not, however, apply to all classes of derivatives; the classes of derivatives subject to the clearing obligation at any given time are separately defined in Commission delegated regulations (see Application and timetable). Intra-group transactions and pension scheme arrangements may, on certain conditions, receive an exemption from the clearing obligation (see Exemptions).
The EMIR reporting obligation obliges both counterparties of a derivative contract to ensure that the details of the contract they have concluded and of any modification or termination of the contract are reported to a trade repository registered or recognised in accordance with the Regulation. The details must be reported no later than the working day following the conclusion, modification or termination of the contract. The reporting obligation applies to all undertakings that enter into derivative contracts, including derivative contracts other than OTC derivative contracts, i.e. also derivative transactions in stock exchanges and comparable trading venues. There are no exemptions. In addition, financial counterparties and non-financial counterparties which exceed the clearing threshold must report to a trade repository daily on the valuations and collateral of their contracts.
In addition, EMIR obliges undertakings to apply certain risk-mitigation techniques to OTC derivative contracts not cleared by a CCP. Risk-mitigation techniques include
- timely confirmation of the terms of OTC derivative contract
- portfolio reconciliation
- resolution of disputes
- portfolio compression
- daily valuation
- mandatory exchange of collateral.
Mandatory exchange of collateral and the requirement for daily valuation apply only to financial counterparties and to such non-financial counterparties that exceed the clearing threshold. Intra-group transactions may, on certain conditions, receive an exemption from exchange of collateral (see exemptions). Other risk-mitigation techniques apply to all undertakings and there are no exemptions, but the more specific content of obligations in certain details depends on whether the undertaking is a financial counterparty and, if it is not, whether or not it exceeds the clearing threshold.
Notifications to the Financial Supervisory Authority
Notifications of exceeding and no longer exceeding the clearing threshold
Under Article 10(1) of EMIR, an undertaking which is not a financial counterparty is obliged to notify the FIN-FSA when its positions in OTC derivative contracts exceed the clearing threshold (see Clearing thresholds). A notification of exceeding the threshold is sent to the email address email@example.com by writing in the email subject field EMIR and using the enclosed form (excel).
If an undertaking which has submitted a notification of exceeding the clearing threshold to the FIN-FSA later no longer exceeds the threshold, the undertaking must also notify this to the above-mentioned email address using the enclosed form (excel).
In addition to the FIN-FSA, the undertaking must notify ESMA directly if it exceeds or no longer exceeds the clearing threshold. ESMA has provided guidelines on its own website for those making notifications of exceeding and no longer exceeding the clearing threshold.
Reporting of unconfirmed OTC derivative transactions
Under Article 12(4) of Commission Delegated Regulation (EU) 149/2013, adopted pursuant to Article 11(14) of EMIR, financial counterparties must have the necessary procedures to report on a monthly basis to the FIN-FSA the number of unconfirmed OTC derivative transactions that have been outstanding for more than five business days. These reports do not need to be sent, however, unless the FIN-FSA specifically requests them.
Reporting of disputes
Under Article 15(2) of Commission Delegated regulation (EU) 149/2013, adopted pursuant to Article 11(14) of EMIR, financial counterparties must report to the FIN-FSA any disputes between counterparties relating to an OTC derivative contract, its valuation or the exchange of collateral for an amount or value higher than EUR 15 million and which are unresolved for at least 15 business days. If the need arises to make such a report, the counterparty must contact the FIN-FSA (see Contacts).
Exemption of intra-group transactions from the clearing obligation
An exemption from the clearing obligation may be received for intra-group transactions, as follows:
- by notifying the FIN-FSA when a counterparty in the group is established in Finland or another EU Member State
- with the permission granted on application by the FIN-FSA, when a counterparty in the group is established in a third country.
The FIN-FSA should be contacted before a notification or application is made (see Contacts).
Exemption of intra-group transactions from mandatory exchange of collateral
Intra-group transactions according to Article 3 of EMIR may, on certain conditions, also receive an exemption from mandatory exchange of collateral.
Under Article 11(5) of EMIR, mandatory exchange of collateral is not applied to intra-group transactions, on the conditions prescribed therein, if both counterparties are established in Finland. This does not require the FIN-FSA’s permission nor a notification to the FIN-FSA. The counterparties themselves must ensure that the conditions prescribed in Article 11(5) are fulfilled.
In other cases, an exemption of intra-group transactions from exchange of collateral requires a notification to the FIN-FSA according to Article 11(6-10) of EMIR and possibly to the competent authority of another Member State in which a counterparty in the group is established, or permission granted by them on application. The FIN-FSA should be contacted before such a notification or application is made (see Contacts).
Pension scheme arrangement exemptions to the clearing obligation
OTC derivative contracts that decrease investment risks of pension scheme arrangements according to Article 2(10)(a-b) of EMIR are, pursuant to the transitional provision of Article 89(1) of the Regulation, temporarily exempted from the clearing obligation (see Application and timetable). It is also possible to apply to the FIN-FSA for a similar exemption from the clearing obligation for pension scheme arrangements according to Article 2(10)(c-d) of EMIR. The FIN-FSA should be contacted before such an application is made (see Contacts).
EMIR and all lower-level statues adopted pursuant to it are directly applicable legislation in the EU Member States.
EMIR entered into force on 16 August 2012, but the commencement of the application of its various obligations is provided for separately in the lower-level statutes that specify them. All of the obligations are now in force, but with the following qualifications:
- Clearing obligation: The obligation applies, for now, only to certain precisely defined classes of interest rate and credit derivatives, and the entry into force of the obligation for each class is provided for separately. In addition, counterparties have been divided into different categories for the phasing of the entry into force, and the obligation has not yet entered into force for all of the categories in any of the classes of derivatives. The European Securities and Markets Authority (ESMA) maintains an up-to-date public register which has more detailed information on the classes of derivatives included within the clearing obligation and when the obligation will enter into force for each category of counterparty. The register is on ESMA’s website.
- Risk-mitigation techniques: Under Article 36 of Commission Delegated Regulation (EU) 2016/2251, the commencement of the entry into force of the application of the initial margin requirements included in the mandatory exchange of collateral have been phased over the period 4 February 2017–1 September 2020.
On 4 May 2017, the Commission also adopted a proposal for a regulation (COM(2017) 208 final), which includes amendment proposals for the obligations addressed here. The proposal also includes an extension of the temporary exemption from the clearing obligation for pension scheme arrangements according to Article 2(10)(a-b), which expired on 17 August 2018. The content and entry into force of possible amendments remains open, however.
FIN-FSA’s EMIR releases
- 20.12.2016 Exchange of collateral with respect to OTC derivatives contracts of financial counterparties to become mandatory (Supervision release 87/2016)
- 30.4.2014 OTC-johdannaisille määritysvelvollisuuksia ja vakuusvaatimuksia (Supervision release 24/2014 - in Finnish)
- 14.10.2013 National Board of Patents and Registration to be the authority issuing LEI identifiers (pdf) (Article in Market newsletter 3/2013)
- 20.6.2013 Implementation of EMIR continues (pdf) (Article in Market newsletter 2/2013)
- 12.3.2013 Lisää EMIR-sääntelyä voimaan 15.3.2013 (Supervision release 19/2013 - in Finnish)
- 14.12.2012 EMIR-asetuksen toimeenpano on alkanut (pdf) (Article in Market newsletter 4/2012 - in Finnish)
- 15.6.2012 EMIR-asetus OTC-johdannaisista, keskusvastapuolista ja kauppatietorekistereistä – merkittäviä vaikutuksia myös finanssisektorin ulkopuolisiin toimijoihin (pdf) (Article in Market newsletter 2/2012 - in Finnish)