European Union regulation on OTC derivatives.
EMIR (European Market Infrastructure Regulation or Regulation No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories) is directly applicable EU regulation which sets common rules for OTC derivatives transactions (e.g. futures and forwards, options, swaps), for risk mitigation techniques related to those transactions and for reporting of transactions. EMIR came into force on August 16, 2012. Different implementing regulations and requirements will come into force gradually during 2013 and 2014.
EMIR was adopted as a result of 2009 G20’s decision to regulate the OTC derivatives market in details. Its objective is to increase the transparency of the derivatives market and lower the systematic risk caused by derivatives transactions.
Requirements of EMIR apply to OTC derivatives transactions, including interest rate derivatives and FX derivatives (forwards, swaps, options). EMIR requirements apply both to financial and non-financial counterparties. Requirements of EMIR do not apply to private individuals and certain government institutions.
EMIR (European Market Infrastructure Regulation) covers derivatives that are traded either on exchanges or over-the-counter (i.e. ETD and OTC derivatives). However, not each and every EMIR obligations pertain to both kinds of derivatives.
From financial point of view, derivatives are financial assets the value of which depends on the value of one or more underlying asset. For example:
The underlying asset of a derivative contract can be one or more of the following instruments:
* Тhe above list in only a selection of some derivatives and does not intend to be a full list of derivatve contracts.
From legal point of view, EMIR (Regulation (EC) No 648/2012) provides the following definiton for derivatives:
Investment firms, insurance undertaking, reinsurance undertaking, UCITS and its management company, institution for occupational retirement provision, alternative investment fund.
An undertaking established in the European Union that is not classifed as CCP or financial counterparty.Two categories of non-financial counterparties are recognized:
Under EMIR two clearing thresholds are determined:
Regulation (EC) No 149/2013 sets out further details on how to calculate the clearing threshold.
A legal person that interposes itself between the counterparties to the contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer.
A legal person that centrally collects and maintains the records of derivatives.
| Entity | Covered by EMIR |
|---|---|
| Financial counterparty |
Yes |
| Non-financial counterparty | Yes |
| CCP | Yes |
| Trade repository | Yes |
| Private individual | No |
| Main obligation | Affected derivative type | Affected counterparty type |
|---|---|---|
| Reporting to trade repository | Exchange traded (ETD) and OTC derivatives |
Financial counterparties Non-financial counterparties |
| Clearing via CCP | Centrally cleared OTC derivatives |
Financial counterparties Non-financial counterparties above the clearing treshold |
| Risk mitigation techniques | Non-centrally cleared OTC derivatives |
Financial counterparties Non-financial counterparties above the clearing treshold |
Obligation to report transactions applies to all counterparties of derivatives transactions, only private individuals are excluded. This means that both counterparties to a derivatives transaction must report the transaction, modifications to the transaction and termination of the transaction to a licensed trade repository of their choosing. Reporting obligation can also be delegated to the other counterparty or to a third party. Transaction has to be reported no later than the working day following the conclusion, modification or termination of the transaction.
In transaction reports the counterparties to the transaction must be identified by Legal Entity Identifier (LEI), which is a new identifier developed globally to identify counterparties to financial transactions. Until LEI format and issuing principles are finalized, an "interim" LEI code (or pre-LEI) must be used.
Obtaining LEI (or equivalent identifier) is the responsibility of each counterparty to a derivatives transaction.Raiffeisenbank /Bulgaria/ EAD can refuse to conclude new derivatives transactions with clients who do not have a required identifier. Organizations issuing LEIs are listed on webpage www.leiroc.org. Costs related to obtaining and maintaining the LEI (or equivalent identifier) have to be borne by the client.
Reporting obligation is expected to come into force on February 12, 2014. In addition to new transactions concluded from that date forward also all derivatives transactions that were open on August 16, 2012 or have been concluded after that date have to be reported.
Clearing obligation applies to transactions with standardized OTC derivatives. Instruments covered by that obligation will be published on ESMA (European Securities and Markets Authority) webpage: www.esma.europa.eu. Clearing obligation concerning the first derivatives instruments is expected to come into force in 2014 or 2015.
Clearing obligation applies to financial counterparties and to non-financial counterparties exceeding the so-called clearing threshold. Clearing thresholds have been set so that only companies having very large speculative positions in derivatives would exceed them (e.g. a company exceeds the threshold if it has a speculative position in interest rate or FX derivatives with nominal value of more than 3 billion euros).
Starting March 15, 2013 companies exceeding the clearing threshold have to notify the Financial Supervision Authority and ESMA about it (they also have to notify when they have fallen below the threshold). Transactions must be cleared only when clearing obligation applies to both counterparties to the trade.
To clear a transaction, counterparties must become a member of a licensed central counterparty (CCP) or use the services of a CCP member or its client. Clearing means that parties, who originally conclude a derivatives transaction, assign the transaction to CCP so that CCP becomes a counterparty to both original parties to the trade.
Main risk mitigation techniques affecting non-financial counterparties:
The application of the different EMIR requirements depends on the classification of the counterparty – whether it is a financial or non-financial one. In the latter case what matters is the deal’s type, purpose and size. Classification of counterparties under EMIR is different than that under MIFID. Under the Annex on the requirements of Regulation (EU) 648/2012/ EMIR, clients must notify KBC Bank Bulgaria EAD of their categorization. If the client does not notify the Bank, the client will be considered as a non-financial counterparty below the clearing threshold. KBC Bank Bulgaria EAD is a financial counterparty under EMIR.
The above written was made only for informational purposes about EMIR and does not present binding commitment by the Bank. KBC Bank Bulgaria EAD bears no responsibility neither for the content of the current document nor for its effectiveness. Please consult a legal expert for detailed view of the applicable legal provisions and obligations.
