The regulations include requirements for reporting of derivative contracts and implementation of risk management standards. It established common rules for central counterparties and trade repositories.
The objective of the legislation is to reduce systemic counterparty and operational risk, and help prevent future financial system collapses.
The European Market Infrastructure Regulation (EMIR) is a body of legislation for over-the-counter (OTC) derivatives, central counterparties and trade repositories. EMIR was introduced by the European Union (EU) as implementation of the G20 commitment to reduce systemic, counterparty and operational risk, and increase transparency in the OTC derivatives market. It was also designed as a preventative measure to avoid fallout during possible future financial crises similar to the collapse that followed the Lehman Brothers bankruptcy in 2008.
It establishes common rules for central counterparties, which interpose themselves between involved parties in a contract to serve as the focal point of each trade, and trade repositories, which collect and maintain all records of trades. EMIR requires the reporting of all derivatives, whether OTC or exchange traded, to a trade repository. EMIR covers entities that qualify for derivative contracts in regards to interest rate, equity, foreign exchange, or credit and commodity derivatives. It also outlines three sets of obligations, including the clearing, reporting and risk mitigation of applicable products.
EMIR's set of obligations were designed to take effect on a phased basis over a period of several years.
Entities that qualify for EMIR must report every derivative contract they enter into to a trade repository. They must also implement new risk management standards according to EMIR, including operational processes and margining related to their bilateral OTC derivatives. EMIR also covers trades that are not cleared by a central counterparty, and entities that qualify must submit all OTC derivatives subject to a mandatory clearing obligation for review. Counterparties must file reports wherever they enter into derivatives transactions, in the European Economic Area or elsewhere.
The European Securities and Markets Authority (ESMA) applies mandatory clearing obligations for specific OTC derivative contracts if a contract has been assigned a central counterparty under EMIR. The obligations require that over-the-counter derivatives trades are cleared through central counterparties. EMIR granted a temporary exemption from these guidelines to pension funds until August 2017.