EMIR
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Know the numbers? Now learn the why.Read the EMIR: Derivatives, Clearing and CCPs study notes: short answers, key numbers and the law behind each rule.
- What is EMIR for, and how has it changed since 2012?
- Who must report derivatives to a trade repository, and who is liable?
- Which OTC derivatives must be centrally cleared, and by whom?
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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?
- Exam material: investment funds and central securities depositories (CSDs), with a new 'small financial counterparty' category. Since 17 June 2019 (Refit): all AIFs established in the EU (and, where relevant, their EU AIFMs) and CSDs, with employee share plan funds and securitisation vehicles excluded; UCITS (and, where relevant, their management companies) and AIFs with an authorised or registered AIFM were already FCs from 2012. A small FC, below every clearing threshold, is exempt from clearing but still exchanges collateral and reports.
- What must a counterparty do when it exceeds (or ceases to exceed) the clearing threshold?
- On exceeding a threshold, or if it does not calculate its positions, it notifies ESMA and its competent authority immediately (CySEC for the firms CySEC supervises), sets up clearing within four months and then clears new trades in declared classes. On falling back below, exam material: it informs both again. Since 17 June 2019 (Refit): to leave the clearing obligation it must show its competent authority that its positions are back below the thresholds.
Clearing obligation
- Which OTC derivative classes fall under the clearing obligation?
- Exam material: interest rate, foreign exchange, equity, credit and commodity derivatives. In law (EMIR since 2012; first declared classes cleared from 21 June 2016): only classes declared by delegated regulation must be cleared, namely interest rate swaps in EUR, GBP, USD, JPY, NOK, PLN and SEK (with FRAs in EUR, NOK, PLN and SEK) and untranched index credit default swaps on two European indices. No FX, equity or commodity class has ever been declared; the five asset classes are the ones counted towards the clearing thresholds.
- 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?
- Intragroup transactions, on conditions: both parties fully consolidated under centralised risk procedures, with prior notice to the competent authorities (or, with a third-country group member, the EU party's authorisation). Exam material: pension funds included. Since 18 June 2023: the separate transitional exemption for EU pension schemes has ended, and since 24 December 2024 only trades with third-country pension schemes exempt under their own law are carved out. Post-trade risk reduction trades and certain covered bond and securitisation hedges are also exempt.
- When does the clearing obligation reach non-EU counterparties?
- Only for OTC derivatives in declared classes. Exam material: an EU counterparty trading with an entity established outside the EU, and two non-EU entities whose trade has a direct, substantial and foreseeable effect in the EU. In law (unchanged since 2012): the EU party must itself be in scope and the non-EU entity is caught only if it would be subject to clearing were it established in the EU; two such non-EU entities are caught where the contract has that EU effect or clearing is needed to prevent evasion of EMIR.
- 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?
- Since 18 June 2020, for OTC contracts: the FC reports for itself and an NFC below the clearing thresholds (NFC-) and is liable, unless the NFC- chooses to report itself after telling the FC, in which case the NFC- is liable; the UCITS management company reports a UCITS's OTC contracts and the AIFM an AIF's. Otherwise each counterparty reports its own trades, and delegating the task does not shift the liability.
- 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?
- Exam material: both initial margin (for potential future exposure) and variation margin (for current changes in value), under Delegated Regulation (EU) 2016/2251, reducing counterparty and systemic risk. In law: variation margin applies between FCs and NFCs above a threshold and is calculated at least daily; since 1 September 2022 initial margin applies only where both parties, or their groups, exceed €8 billion of uncleared notional, up to €50 million (€10 million within a group) may go uncollected, and it need not be collected on physically settled FX forwards and swaps. Since 24 December 2024: uncleared single-stock and equity index options are exempt from margin.
- 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 the details of every derivative contract, OTC or exchange-traded, to a trade repository by the next working day, and repositories publish aggregate positions by class of derivatives for both OTC and listed derivatives. Exam material: ESMA is responsible for their 'surveillance' and 'accreditation'. In EMIR's terms (since 2012): ESMA registers EU repositories, supervises them and can withdraw their registration; a third-country repository can be used once ESMA recognises it, and it stays supervised in its home country.
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?
- Exam material: their business means they would easily exceed the limit, so they are explicitly exempted. In law (CRR since 1 January 2014; IFR since 26 June 2021): it is not the CCP that is exempt but other firms' exposures to it, and the exemption is in the CRR, not EMIR: a clearing member's trade exposures and default fund contributions to a qualifying CCP, and certain client trade exposures, are exempt from the limit; Class 2 CIFs apply the IFR, which excludes exposures to CCPs. The limit itself: 25% of eligible capital in the exam material; since 28 June 2021, 25% of Tier 1 capital.
- 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 measures its potential liquidity needs every day. Exam material: the stress assumes the default of the two clearing members to which it has the largest exposures. Since 24 December 2024 (EMIR 3): it assumes the default of at least the two entities to which it has the largest exposures and that are clearing members or liquidity providers, central banks excluded.
- 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?
- Public: prices and fees of each service, with discounts, rebates and the conditions for them (published by the CCP and its clearing members), cleared volumes and the technical requirements of its communication protocols. Clearing members and clients learn the risks of its services. Exam material: costs and revenues go to CySEC, and CySEC, consulting ESMA, may keep a clearing member's breach unpublished. Since 24 December 2024 (EMIR 3): costs and revenues go to ESMA and the CCP's competent authority, and that authority alone decides on non-publication, on the same four grounds: a threat to financial stability or to market confidence, serious jeopardy to the financial markets, or disproportionate damage to the parties. No CCP is authorised in Cyprus.