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. The amendments to the Regulation that entered into force on 17 June 2019 (EMIR Refit) have been taken into account herein.
To whom does EMIR apply?
EMIR applies to all undertakings that enter into derivative contracts. The application of the different 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 all 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
- alternative investment funds and their managers
- central securities depositories
In addition to this classification, the application of certain EMIR obligations depends on whether an undertaking regularly calculates its position in OTC derivative contracts under the Regulation or, if it does not calculate its position, whether the undertaking’s position exceeds in some asset class a clearing threshold under the Regulation (see below). If an undertaking does not calculate its positions, or if it calculates and exceeds the threshold, the undertaking must notify the European Securities and Markets Authority (ESMA) and the Financial Supervisory Authority (FIN-FSA) of this (see “Notifications to the FIN-FSA” below).
A financial counterparty that chooses to calculate its position shall calculate, at least every 12 months, its aggregate month-end average position (gross notional value) by asset class for the previous 12 months. The calculation shall include all OTC derivative contracts entered into by that financial counterparty or entered into by other entities within the group to which the financial counterparty belongs. A non-financial counterparty may, however, exclude from its calculation those derivative contracts which it and other non-financial counterparties have entered into and which reduce risks relating to the commercial or treasury financing activity of the counterparty or the group in question.
Under Article 11 of Commission Delegated Regulation (EU) 149/2013, adopted pursuant of Article 10(4) of EMIR, the clearing thresholds by asset class in terms of gross notional values are:
- OTC credit derivative contracts: EUR 1 billion
- OTC equity derivative contracts: EUR 1 billion
- OTC interest rate derivative contracts: EUR 3 billion
- OTC foreign exchange derivative contracts: EUR 3 billion
- OTC commodity or other derivative contracts: EUR 3 billion
The application of the EMIR obligations further depends in certain respects 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 counterparties to clear the OTC derivative contracts concluded between each other in a CCP authorised and recognised under the Regulation. The clearing obligation applies to derivative contracts between counterparties which do not regularly calculate their position under the Regulation or which calculate their position but exceed the threshold in some asset class.
The clearing obligation does not, however, apply to all derivatives; the classes of derivatives subject to the clearing obligation are defined separately in Commission delegated regulations. ESMA maintains on its website an up-to-date public register of the classes of derivatives subject to the clearing obligation (currently certain interest rate and credit derivatives). In addition, those non-financial counterparties that calculate their positions under the Regulation shall be subject to the clearing obligation only in those asset classes where their positions exceed the clearing threshold.
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 under the Regulation. After a certain transition period (see Application and timetable), financial counterparties are responsible, however, for reporting on behalf of both counterparties such OTC derivative contracts they enter into with non-financial counterparties that are not subject to the clearing obligation, unless the counterparties specifically agree otherwise. The details must be reported to a trade repository no later than the working day following the conclusion, modification or termination of the contract.
All derivative contracts, including also so-called exchange-traded derivatives, are subject to the reporting obligation. Under certain conditions, intra-group derivatives may, however, be exempted from the reporting obligation (see Exemptions below).
All financial counterparties and such non-financial counterparties which do not calculate their position under the Regulation or which do calculate their position but exceed some clearing threshold shall also report to a trade repository daily 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 to financial counterparties and to such non-financial counterparties which do not calculate their position under the Regulation or which do calculate their position but exceed some clearing threshold. Under certain conditions, intra-group transactions may receive an exemption from exchange of collateral (see Exemptions below).
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 calculates its position under the Regulation and, if it does calculate its position, whether or not it exceeds some clearing threshold.
Notifications to the FIN-FSA
Notifications related to calculation of positions
Under Article 4a(1) and Article 10(1) of EMIR, an undertaking that decides not to calculate its positions in OTC derivative contracts regularly under the Regulation shall immediately notify ESMA and the FIN-FSA thereof.
An undertaking which decides to calculate its position under the Regulation and whose position, according to the calculation, exceeds the clearing threshold in some asset class is also obliged to immediately notify ESMA and the FIN-FSA thereof. If the positions do not, according to the calculation, exceed the clearing threshold in any asset class, there is no need to notify the FIN-FSA about the calculation.
If, however, an undertaking which has previously submitted a notification of exceeding the clearing threshold to the FIN-FSA later no longer exceeds the clearing threshold and therefore wishes to be released from the clearing obligation, the undertaking must also notify ESMA and FIN-FSA that it no longer exceeds the clearing threshold.
For these notifications, there are instructions and a template on ESMA’s website (see Notification). The ESMA template can also be used in notifying the FIN-FSA. Notifications to the FIN-FSA should be sent to the email address firstname.lastname@example.org.
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 to the FIN-FSA on a monthly basis 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 to the FIN-FSA, 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 derivative contracts from the reporting obligation
Under Article 9(1) EMIR, the reporting obligation shall not apply to derivative contracts within the same group where at least one of the counterparties is a non-financial counterparty, provided that:
- both counterparties are included in the same consolidation on a full basis;
- both counterparties are subject to appropriate centralised risk evaluation, measurement and control procedures; and
- the parent undertaking is not a financial counterparty.
It is also required that the counterparty notify the FIN-FSA of its intention to apply this exemption. Notifications to the FIN-FSA should be made in accordance with this model and should include this attachment (Excel). Completed notifications and attachments should be sent to the email address email@example.com
Exemption of intra-group transactions from the clearing obligation
Intra-group transactions according to Article 3 of EMIR may receive an exemption from the clearing obligation, 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 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:
- 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 has been phased over the period 4 February 2017–1 September 2020. There may be further changes to this phasing.
- The responsibility of financial counterparties to report information to a trade repository on behalf of both counterparties about such OTC derivative contracts they enter into with non-financial counterparties which are not subject to the clearing obligation will enter into force on 18 June 2020.
The temporary exemption from the clearing obligation for pension scheme arrangements according to Article 2(10)(a-b) expires on 8 June 2021.
FIN-FSA’s EMIR releases
- 20.6.2019 EMIR Refit (Article in Market newsletter 2/2019)
- 22.5.2019 EMIR Refit - Kaikkien OTC-johdannaisten käyttäjien tulee laskea johdannaispositioiden määrä, kun muutokset tulevat voimaan (Supervision release 19/2019 - in Finnish)