CySEC Advanced Chapter 10 Flashcards: EMIR | ExamPass CY

All 24 cards in this deck

EMIR framework

What is EMIR, when did it come into force, and what did it implement?: The European Market Infrastructure Regulation — in force in 2012, implementing G20 commitments to reform derivatives markets after the 2008 crisis exposed weaknesses in OTC derivatives markets.
What are the three aims of EMIR?: To increase transparency in OTC derivatives markets, mitigate credit risk, and reduce operational risk (e.g. fraud and human error, addressed via electronic confirmation). Product intervention is MiFIR, not EMIR.
What is EMIR Refit and what two clearing-obligation changes did it introduce?: Regulation (EU) 2019/834, in force 17 June 2019. It changed the way counterparties subject to the clearing obligation are determined, and introduced a mechanism to suspend the clearing obligation.

Counterparties

What are the two counterparty categories under EMIR?: Financial counterparties (FCs) — banks, insurers, asset managers — and non-financial counterparties (NFCs), such as a listed company taking a position in an OTC derivative to hedge.
Which entities did EMIR Refit add to the definition of financial counterparties?: Investment Funds and Central Securities Depositories (CSDs). Refit also introduced the 'small financial counterparty' category for proportionate treatment.
What must a counterparty do when it exceeds (or ceases to exceed) the clearing threshold?: Inform both ESMA and the relevant national competent authority (e.g. CySEC).

Clearing obligation

Which OTC derivative classes fall under the clearing obligation?: Interest rate, foreign exchange, equity, credit and commodity derivatives.
What is the difference between the bottom-up and top-down approaches to determining cleared classes?: Bottom-up (Art. 5(2)): classes already cleared by authorised/recognised CCPs. Top-down (Art. 5(3)): ESMA proactively identifies classes that should be cleared but for which no CCP yet exists. Both are used together.
Which transactions are exempt from central clearing?: Intra-group transactions (under conditions), including pension fund transactions — they serve internal risk management and pose less systemic risk.
When does the clearing obligation reach non-EU counterparties?: When an EU counterparty trades with an entity established outside the EU, or when two non-EU entities trade and the transaction has a direct, substantial and foreseeable effect in the EU.
If an NFC below the threshold (NFC-) trades with an NFC above it (NFC+), who must clear?: Neither. The clearing obligation applies to a contract only when BOTH counterparties are subject to it; since the NFC- is not, the trade is subject to risk mitigation techniques instead.
Which OTC derivatives must be centrally cleared, and through what?: Standardised and liquid OTC derivative contracts, cleared through a Central Counterparty (CCP) authorised (EU) or recognised (non-EU) under EMIR. The CCP becomes buyer to every seller and seller to every buyer.

Reporting & risk mitigation

Under EMIR Refit, who bears reporting responsibility in FC–NFC, UCITS and AIF trades?: The FC reports for both itself and an NFC not subject to clearing; the management company reports for a UCITS; the AIFM reports for an AIF.
What are the five EMIR risk mitigation techniques for non-centrally cleared OTC derivatives?: Timely confirmation, portfolio reconciliation, portfolio compression, dispute resolution procedures, and exchange of collateral. Central clearing is the alternative, not one of these techniques.
What margin must be exchanged for OTC derivatives not cleared by a CCP?: Both initial margin (potential future exposure) and variation margin (current mark-to-market losses), under Commission Delegated Regulation 2016/2251 — reducing counterparty and systemic risk.
On what condition is an intra-group transaction exempt from the collateral exchange requirement?: Where there is no foreseen practical or legal impediment to the prompt transfer of own funds or repayment of liabilities between the parties.
To whom are derivative contracts reported, and what do trade repositories publish?: Counterparties and CCPs report all derivative-contract details to trade repositories, which publish aggregate positions by class of derivatives for both OTC and listed derivatives. ESMA supervises and grants/withdraws their accreditation; TRs may be third-country (recognised).

Central counterparties

What is the minimum initial capital for a CCP authorised under EMIR?: €7.5 million. Capital (including retained earnings and reserves) must be proportionate to the CCP's risks and sufficient at all times for an orderly wind-down.
Why are CCPs exempt from the CRR large exposure requirements?: By design a CCP takes on exposures to all its clearing members and would routinely, unavoidably exceed the 25% large exposure limit — so EMIR explicitly exempts CCPs.
From where may a CCP derive liquidity, and what reliance risk must it consider?: From central bank liquidity, creditworthy commercial bank liquidity, or both. It must consider the risk of relying solely on commercial bank credit lines, which may themselves be under stress in a crisis.
How frequently must a CCP measure exposures, and what is the credit-line concentration limit?: It must measure credit exposures to each clearing member on a near-time or real-time basis. A clearing member together with its parent and subsidiaries may not provide more than 25% of the CCP's needed credit lines.
What daily liquidity stress test must a CCP perform?: It must measure potential liquidity needs assuming the simultaneous default of the two clearing members to which it has the largest exposures.
Why are margins and haircuts considered procyclical?: Risk-based models set margins low when volatility is low (letting leverage build up) and raise them sharply when volatility spikes — forcing fire sales of assets at distressed prices, which further depresses prices and amplifies the downturn.
What are a CCP's key disclosure obligations under EMIR?: Prices and fees per service (including discounts/rebates) are disclosed publicly; costs and revenues are disclosed to CySEC. Clearing-member breaches are disclosed publicly unless CySEC (with ESMA) finds it would threaten financial stability or market confidence, jeopardise markets, or cause disproportionate damage.